If you’ve exhausted all other means of resolving your credit problems and still can’t payoff your debts, you might have to consider filing for bankruptcy. This could eliminate some or all of your financial obligations and help you restructure your payments to a more manageable level. Federal law allows you to pay your lenders through the use of your assets while freeing you from many of your unpaid financial burdens altogether. The laws are not only designed to help individuals, but also to protect lenders and creditors.
Types of Bankruptcy
We’ll be discussing Chapter 7 and Chapter 13 bankruptcies since they’re the most common. But there are four types of bankruptcy for individuals:
- Chapter 7 – Sometimes called a ‘straight’ or ‘liquidation’ bankruptcy and the most common type filed by individuals.
- Chapter 11 – Typically used by corporations to reorganize their business affairs but can also apply to individuals.
- Chapter 12 – Designed for use by farmers.
- Chapter 13 – Also known as a ‘debt adjustment’. Intended for those who want to use future income to pay some or all of their debt.
Who Can File Bankruptcy?
There are very few limitations on who can file for Chapter 7 bankruptcy. You can qualify as long as you’re willing to a follow a financial plan – and as long as you understand there will be long-term negative consequences to your finances.
Chapter 13 is limited to individuals (and unincorporated businesses) that have a regular source of income and whose secured debt is less than $750,000 and unsecured debts of less than $250,000. The term “regular source of income” refers to income that is sufficient enough to enable regular payments by the trustee to any creditors involved with the filing.
What is Included In Your Bankruptcy Estate?
The property that can be liquidated to pay your debts is called your ‘bankruptcy estate’ and consists of all property that is solely owned or co-owned with another person. This includes property that was received through an inheritance, a divorce settlement, a gift or life insurance proceeds.
The estate is reduced by ‘exempt assets’, which may include a limited amount of equity in your personal residence, vehicles, household goods and personal effects, tools of your trade, life insurance and even deposit accounts. Generally, retirement benefits are excluded from the bankruptcy estate altogether. The remaining balance is available to the trustee to administer to pay off your debt.
The Difference Between Chapter 7 and Chapter 13 Bankruptcies
Chapter 7 Bankruptcy eliminates all your outstanding financial obligations through a court decision. In turn, you must turn over non-exempt assets that will be sold to pay back your creditors. Keep in mind that not all debts are subject to discharge under a Chapter 7 bankruptcy claim.
Chapter 13 Bankruptcy, on the other hand, does not eliminate your obligations altogether. It provides a plan for any future income to be administered by the court to repay your creditors. After determining a reasonable budget, your remaining income is managed by a trustee who will pay creditors in accordance with the approved plan. A plan generally lasts three years, but may last up to five years if the court approves the longer period. At the conclusion of the plan, the debtor is entitled to receive a discharge of any remaining debt.
Procedures for Filing Bankruptcy
STEP 1: Collect all your financial information i.e. assets, debts, income, expenses, etc. and a Statement of your Intentions.
STEP 2: File the petition, schedules, and statement of financial affairs. Pay the filing fee to the bankruptcy court.
STEP 3: Your creditors are notified by the court of the case and information pertinent to their possible recourse or challenges.
STEP 4: Meet with your creditors and the court appointed trustee to exam your situation and answer questions posed to you by your creditors.
STEP 5: Complete the reaffirmation, redemption or surrender of secured collateral according to the Statement of Intentions filed with the case
STEP 6: All parties will receive the discharge notice approximately 90 days after filing Chapter 7 or at the conclusion of payments in a Chapter 13 case.