Bankruptcy. Just saying the word can bring a lump to your throat and put a knot in your stomach. What is bankruptcy, and how do you know if it's for you?
Are your debts overwhelming? Are you worried about how you're going to pay all your bills this month? Are you considering filing personal bankruptcy? Before you decide to take this irreversible step, make sure you understand what bankruptcy is and how considering bankruptcy may effect you..
U.S. Bankruptcy Law Basics
The purpose of bankruptcy is two-fold:
* To provide relief when you cannot pay your debts
* To return as much money as possible to your creditors
Everyone has their own bankruptcy questions, but there are several steps involved with declaring bankruptcy. First, you may want an attorney because legal paperwork must be filed in federal bankruptcy court by US bankruptcy laws. It is not mandatory that you have an attorney but having the assistance of an expert may be helpful. Second, you need to be aware of the filing fee (approximately $130), the administrative fee (approximately $30), and the attorney's fee (variable). Third, you must determine the type of bankruptcy you can file. There are primarily two types of personal bankruptcy available to a consumer: Chapter 7 and Chapter 13.
Filing a Chapter 7 Bankruptcy
If you have insufficient income to pay your debts and have no prospect of creating additional income, Chapter 7 may help you. A Chapter 7 bankruptcy gives you a clean slate. This means that many of your unsecured debts are discharged, and you don't have to repay them. But what about secured debt like mortgages and car payments? If you file Chapter 7, you maintain responsibility for your secured debt if it is considered exempt. The laws determining what property is exempt vary according to your state of residence, so check with your bankruptcy attorney. A court-appointed trustee generally sells non-exempt property, such as real estate or personal property of value, and the proceeds are used to pay your creditors.
You should keep in mind that not all unsecured debt is dischargeable. For example, Chapter 7 does not eliminate:
* Government student loans
* Taxes
* Fraudulently created debts
* Alimony
* Child support
You will continue to be responsible for these debts, even after you file a Chapter 7 bankruptcy.
Filing a Chapter 13 Bankruptcy
A Chapter 13 bankruptcy, also called the wage-earner plan, gives you some breathing room with your unsecured debt. When you file Chapter 13, the courts appoint a trustee who is responsible for summarizing all of your debts into a payment plan you can afford. The trustee allocates your monthly income to your creditors. This type of bankruptcy relief is available to you if you have:
* A regular source of income
* Less than $250,000 in unsecured debt and less than $750,000 in secured debt
In Chapter 13 your debts are not discharged and you keep your property. Generally, the repayment schedule lasts from three to five years and, in certain cases, some of your debt may be forgiven.
Consider The Impact of Bankruptcy
Financial relief can be a positive effect of bankruptcy; however, you should weigh this relief carefully against the following:
* Bankruptcy can stay on your credit report for up to 10 years
* You may have difficulty re-establishing credit
* You may have difficulty renting or buying a home for several years
* Your debts can only be discharged once every six years under Chapter 7
* It may be more difficult for you to get some types of jobs (particularly those dealing with money).
Keep in mind that credit assistance programs work similarly to Chapter 13 bankruptcy but without the stigma usually associated when considering bankruptcy.
The Final Decision
Making the decision to declare personal bankruptcy is not one to be taken lightly and should be considered as a last resort. You may have other options that will work for your situation - make sure you explore them all.
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