Bankruptcy – FAQs, Filing, Chapter 7, Chapter 13

Are you currently drowning in a sea of debt but feel you have no lifeline? If you want to get your life back under control and eliminate stress associated with being in a financial crisis, bankruptcy may be the right solution. Remember, millions of people are in the same situation as you and whether your crisis is because of a bad divorce, poor business dealings, death of a spouse who contributed income to the household, serious illness or injury, or simply mismanagement of money, viable solutions exist.

Both Chapter 7 and Chapter 13 bankruptcy are serious business. Therefore, entering into a legal agreement such as this should never be taken lightly. If you were to ask any responsible financial adviser, debt consolidation counselor, or bankruptcy attorney, each would tell you to consider all other means for getting out of debt prior to bankruptcy. However, if all other options have been exhausted, this government program would help put you back on the right path.

By the end of 2004, fraud associated with bankruptcy had become so serious that in 2005, Congress passed the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005″. If you look at 1980, you would see that only 300,000 people in the United States filed for bankruptcy. Although by 1990 the number had doubled to 600,000, it was still a long way off from the 2.1 million cases filed in 2004. With the new bankruptcy laws, qualifying is dependent on much stricter criteria so people who really need financial relief can get it.

The two available options include Chapter 7 bankruptcy protection and Chapter 13 bankruptcy protection, which can be used for personal and business filing.

Filing Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most common type, which involves assets being liquidated, meaning you could keep only exempt property such as a home, car, clothing, etc, with everything else being sold and any proceeds used to pay off creditor debt. For debt deemed “discharged”, the money owed would be discharged or forgiven. To get started, an attorney would file a petition with the court, listing all your assets, as well as creditors and outstanding debt for each.

In this case, most debt is exempt, consisting of assets you would keep. For nonexempt debt, you would make scheduled payments to the creditors until paid in full. You would have a court-assigned trustee, someone to walk with you through the process and ensure everything lines up with the new bankruptcy laws. Typically, if you have no way of paying debt, have no cosigners on debt, and you know one or more creditors will be taking legal action, Chapter 7 bankruptcy would provide relief.

Filing Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is more a reorganization than liquidation. Only 25% of people use this type of proceeding, usually people who want to pay off debt but need a schedule of three to six years to do it. If you only have nonexempt property that you want to keep, this would be the best option. Remember, the amount of debt repaid could be negotiated, ending with you paying anywhere from 10% to 100% based on your income and amount of debt owed.

Specific qualification criteria are set for a Chapter 13 bankruptcy and because debt level is usually high, this option is often used by business owners with repayments going to secured creditors first. Usually, a Chapter 13 bankruptcy would be used when behind on mortgage payments, owing money to the IRS, wanting to protect assets that would otherwise be liquidated under Chapter 7, and/or receiving collection calls day and night.

Bankruptcy protection can prove beneficial in many instances but there is a negative side to consider. Your credit would be affected negatively up to 10 years, you would be required to pay various fees to file for bankruptcy protection, and securing future credit would be difficult. In fact, many employers, landlords, and insurance companies now base decisions for hiring, renting, and selling policies on a person’s credit score. Therefore, if you file for bankruptcy, you could face new challenges of being hired for a job, renting an apartment or home, or even getting insurance coverage.

FAQs About Filing Bankruptcy

An estimated one million bankruptcy cases are filed on an annual basis. Taken together these cases add up to millions or more to the point, billions of dollars in debt. Here we look at some of the most frequently asked questions (FAQs) surrounding bankruptcy. Having basic information about bankruptcy can be beneficial for everyone.

What is Bankruptcy ?

Bankruptcy is a legal process that is in place to protect an individual or a business if they find themselves in financial trouble and are unable to pay the debts they owe to creditors. The legal process is there to make sure that all parties involved are treated fairly. This includes the creditors as well.

There are different chapters of the federal bankruptcy law. However two of the most common are known as Chapter 7 bankruptcy (also sometimes called straight bankruptcy) and Chapter 13 bankruptcy (also known as wage earner’s bankruptcy or reorganization bankruptcy).

Will my creditors stop bothering me once I file for bankruptcy? Yes, by law they must cease hassling you for payment once you have filed the appropriate papers. No lawsuits, wage garnishees or telephone calls can begin or continue once the bankruptcy process has commenced.

Who will know about my bankruptcy ?

Bankruptcies are a matter of public record. However unless someone started checking up on you no one will know unless you choose to tell them. Be aware however that the record of your bankruptcy will remain on your credit report for a 10 year period. You can request a copy of your credit report after that time to verify for your own peace of mind that the bankruptcy is no longer on your record.

What am I not allowed to keep when I file for bankruptcy ?

When you file for bankruptcy you are allowed a certain amount of latitude. In other words, there are personal exemptions that are permitted that must not go over a specific limit. However assets that exceed the allowed exemptions and/or non-exempt assets such as cars, boats and real estate, etc. will be liquidated by the trustee assigned to your case in order to pay all or a portion of the debt you owe.

If I was bankrupt in the past can I file again in the future ?

Hopefully you will never find yourself in terrible debt again in the future but if you do then be aware that you are permitted to file for Chapter 7 bankruptcy if eight years or more has gone by since you filed for it the first time.

Am I allowed to keep my credit cards when I file bankruptcy ?

This is up to the discretion of the credit card company that you owe money to. If you are discharging a credit card in the bankruptcy then the company will cancel it unless you are able to reaffirm the debt owed to them. Even if your credit card balance is zero and has been paid in full the provider might cancel your card with them anyway.

When will I receive my discharge from bankruptcy?

One of the main goals of the legislation that surrounds bankruptcy is to provide the debtor with the opportunity to erase the debt they are burdened with and to start anew. The debt is erased once the individual has been discharged. In most cases discharge occurs within three to five months after the bankruptcy has been filed, provided the individual fulfills all of the necessary requirements of the bankruptcy proceedings. With a few exceptions most debts are written off upon discharge.

Will I be able to get credit again after I have been discharged from bankruptcy?

The road you must take to get yourself back on good financial footing may take some time but you will get there eventually. Be patient and tenacious in this regard. While you will not likely be accepted for an unsecured credit card right away there are many banks that offer secured credit cards for those who have had financial problems (such as bankruptcy) in the past. In this case you put up the funds for the card that acts as collateral for it.

Two years following the bankruptcy discharge you should be able to apply for a mortgage with little if any worries about being turned down. If you have a steady income and are responsible in paying your bills then this will work in your favor. The size of the down payment you have and how stable your income is will hold more weight than the fact that you filed for bankruptcy. The more time that passes the less significant your bankruptcy is considered to prospective creditors.