- How does bankruptcy work?
So, you’re thinking to file bankruptcy, but you are confused as to how it works. You have asked your friends and relatives, but seem to receive different answers depending on whom you ask. There is a very good reason for these different answers. These disparities exist because there are actually different types of personal bankruptcy.
Two major types of bankruptcy exist:
The two most common forms of personal bankruptcy are Chapter 7 and Chapter 13. The U.S. bankruptcy laws require anyone who files bankruptcy to take a means test. This is not really a test at all – instead, it’s a way for the courts to determine if you qualify to file for bankruptcy. If this means test shows you actually make enough money, from your sources of income to pay back some or all of your debt, then you may file for Chapter 13 bankruptcy and enter into a three to five year payment plan to pay back a portion of your debt.
However, if this means test shows that you do not have enough income, and then you may file Chapter 7. Instead of making payments to your creditors, the Trustee in a Chapter 7 bankruptcy will disburse any non-exempt assets that you have for payments to your creditors. You may keep certain assets that are exempt such as personal belongings, household goods, cars and even your house.
Exemptions vary from state to state, allowing you to keep a portion of the items you own. However, equity in your car or your house, life insurance with cash value, bonuses from work, and even income tax refunds may be considered non-exempt assets.
The Trustee may demand that you turn certain assets over so that he or she can liquidate them to pay your creditors. If you refuse to turn them over, you jeopardize your chance of receiving a bankruptcy discharge, which puts you back to square one.
You may keep some or all of your assets if you file the right type of bankruptcy that is available and bests for you.
Whether if you are current or not with your payments and would like to keep these assets, you may be able with your bankruptcy protection to enter into an agreement with your lender, called a reaffirmation agreement.
This agreement states that even though you filed for bankruptcy, you want to keep your property and you will continue to make payments. Before you enter into a reaffirmation agreement, make sure that you have enough income to make the payments.
If you do not have the money to continue paying for the loans on your house and car, you can surrender these to the bank or to your lender as part of the bankruptcy proceedings.
Any losses by the lender after they liquidate the surrendered asset will be treated as unsecured debt.
In a nutshell, there are two types of personal bankruptcy and two types of debt. Unsecured debt includes credit card charges, payday and personal loans, and even loans from family and friends.
In a Chapter 7 bankruptcy, unsecured debt is wiped out from your record. You do not have to personally pay it back, although your case Trustee may demand that you turn over assets that can be used to pay these creditors.
In a Chapter 13 bankruptcy, you will make monthly payments to your trustee, who will disburse these funds to your creditors.
Secured debt, on the other hand, may be paid back, but only if you decide that you want to keep the asset, such as your car or home. In both Chapter 7 and Chapter 13 bankruptcy proceedings, there are some circumstances in which you can renegotiate the terms of your secured loans with your lender in order to make your payments more manageable.
In December 2007, the U.S. economy starts to go downhill. Companies started to downsize, people started to lose their jobs, and bills could not get paid. It was the start of the recession.
About a year or so later, plenty of people and corporations did not have enough assets to take care of their liabilities and the term “bankruptcy” made its way to the media.
If you are behind with your bills, don’t feel bad. It is not your fault and you are not alone. There are many others that are going through the same. Ever heard of Kodak? Yes, the famous film company that has been in business for the past 131 years. They filed for bankruptcy in January 2012.
Though it’s a commonly used term, not many people understand how bankruptcy works. So, let me give a quick summarization…
Bankruptcy is the government’s way of helping out those who suffer from extremely high amount of debts that would be impossible for them to take care of, based on their current financial status. At the end of the process, the consumer’s total liabilities will be partially or completely gone. The downside is, the record can stay on the person’s credit file for up to ten (10) years.
Bankruptcy methods are not universal. There are various types. These include: Chapter 7, Chapter 11, Chapter 12 and Chapter 13. The most commonly used type is Chapter 7; it is offered to married couples, individuals, partnerships and corporations.
I have a close friend who filed for bankruptcy on his own (with out an attorney) as a last resort and I can assure you it is not something you would want to go through. He fell under the
Chapter 7 category. He made the mistake of not doing his research to understand what he was getting himself into. He based his decision solely on stories he had heard. He read all over the news how filing for bankruptcy has helped people written off their debts and thought that was his solution. But, little did he know that he was signing a liquidation contract.
Most of his possessions were taken away. His house, bank account, jewelry or anything else worth at least a penny was handed over to authorities. It’s true that in return, all of his debts were forgiven. But, at what cost? He was left homeless and depressed. Everything he had worked his whole life for was now gone. So, before using the bankruptcy card, make sure you are prepared for the consequences.
A Chapter 11 and Chapter 12 bankruptcies have more to do with businesses. Chapter 11 gives businesses a chance to reorganize their debt. Chapter 12 is targeted to families in the farming industry who are in need of specific debt restrictions.
If I had to choose, I would go with a Chapter 13 bankruptcy. It is simply a repayment plan and it is available to married couple and individuals only whose debt falls in the specified amount. Based on the debtor’s forecasted income, the government will decide whether a partial or the full debt will have to be repaid. Then, the debtor will start sending payment for the next 3 to 5 years.
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