The Rules Of Declaring Personal Bankruptcy
Bankruptcy defined.
Anyone who’s debts or other financial obligations are too much to handle on a monthly basis or who are subject to wage garnishment should at least consider bankruptcy. Upon approval from a court, bankruptcy will stop wage garnishments, bank levy’s, repossessions or foreclosures, and financial lawsuit judgements.
Bankruptcy should never be considered an easy way to get out paying legitimate debts. There are consequences to filing bankruptcy.
You will likely lose assets.
If your debts arose from the purchase of an asset, such as a home or automobile, you will likely lose the asset.
It will ruin your credit.
Bankruptcy will damage your credit rating for at least 7 years. Credit ratings can be rebuilt over time, but your cost of borrowing after bankruptcy will be dramatically increased.
It could hurt your relationships.
Anyone who you have given money or assets to in the year prior to bankruptcy will be contacted and may be forced to repay the money or return the asset by the courts. This could not only be embarrassing to you but could strain relationships with friends or family.
Bankruptcy is public record.
Potential employers, co-workers, neighbors, friends, or clients will know how much you own and to whom, potentially affecting your employability or ability to conduct business.
Types of bankruptcy.
There are two main types of bankruptcy that are used by consumers. There are others but are normally reserved for corporations or other entities.
Chapter 7
Chapter 7, liquidation bankruptcy, is what most people think when they think of bankruptcy. Under Chapter 7, if approved by the court, your debts will be completely eliminated forever. While this may sound like the best option, remember that you will lose your assets such as your home or automobile or any other asset who’s purchase caused you to get into debt in the first place. In addition, monetary awards resulting from tax refunds, divorce proceeds, inheritances or life insurance that you receive within 180 days of bankruptcy will be taken and used to pay off your past debts.
Chapter 13
Chapter 13 reorganization bankruptcy does not discharge debts but is designed to give you some time to get court assistance. Upon approval of chapter 13, creditors will stop hounding you for payment and will cease foreclosure proceedings if you continue the minimum payments set out by the court.
Under Chapter 13, a trustee will set a monthly living budget and will take all remaining income for a minimum of 36 months to attempt to pay off your debts. If your income is above your State’s median, payments will continue for 60 months. At the end of the period, payments will likely cease, and any remaining debt will be discharged.
So why choose Chapter 13 over Chapter 7?
Based on the description above, it may seem that Chapter 7 is the better option. Why would you want to subject yourself to a strict budget and what amounts to garnishment of the bulk of your disposable income for a 3 to 5 year period? Here are a few reasons Chapter 13 may be a better and only choice.
You can keep your assets.
In cases where you are trying to maintain ownership of an asset, such as a home, but just need some relief because you got a little behind on your bills, chapter 13 is a better choice. Chapter 7 has no mechanism that would allow you to keep your asset. Assets are repossessed and sold.
You don’t qualify for Chapter 7.
Chapter 13 is the only choice if you don’t qualify for Chapter 7. Not every situation qualifies for Chapter 7. For example, if your median annual income is greater that your State’s median income, Chapter 7 is not available to you. Additionally, to qualify for Chapter 7, you generally need to pass a means test. If your disposable income, after subtracting normal living expenses, is enough to repay a reasonable amount of debt, the court will likely turn down Chapter 7, so Chapter 13 is your only option.
What is not covered by bankruptcy.
No matter which bankruptcy is approved, no bankruptcy will discharge all debts. The following are debts that are outside the ability of the courts to renegotiate or discharge.
Student debt
Alimony or child support
Lawsuit judgments against relating to personal injury while driving under the influence of drugs or alcohol
Tax bills from the previous three years
Debt related to fraud or other financial obligations resulting from conviction of a crime
Also remember, as already stated above, debts that are tied to assets are subject to repossession. If you are filing bankruptcy because you can’t make your car payments, bankruptcy may very well discharge your auto loan, but the lien holder then has the right to repossess the car.
Avoiding bankruptcy.
If you find yourself considering bankruptcy, you may want to consider other options first.
If your debt is a result of the purchase of a home, unless you are severely underwater (your home is worth much less that your outstanding mortgage) which is unusual today, you are probably better off selling the home yourself. You may also consider attempting to refinance your mortgage or take out a home-equity loan.
With most debts, creditors really don’t want to go through the bankruptcy process as they risk losing the ability to recoup anything from you. Therefore, they may be willing to negotiate repayment of a smaller amount or an interest rate reduction which keeps the courts out of it an maintains your credit rating.
Especially in cases where debts are not backed by assets, and you don’t own any assets, a possibility is to do nothing. Bankruptcy can be an expensive process. If you have nothing and you refuse to pay, there really isn’t much a creditor can do. You will trash your credit rating, but if you have no income, you’re probably not looking to take out a loan any time soon, so it really doesn’t matter.
