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Is Bankruptcy a Good Idea for You?

Is Bankruptcy a Good Idea for You?

There are many factors that should be taken into account when considering filing for bankruptcy.

1. Figure out what bankruptcy options you have. There are types of bankruptcy most commonly used by individual filers in the United States:

  • Chapter 7 bankruptcy is a bankruptcy proceeding that can wipe out many of your debts in a three to six month period. However, you may lose some of your personal property. You can find out more by looking at Bankruptcy Overview: Chapter 7.
  • Chapter 13 bankruptcy is a bankruptcy proceeding that can be more complicated than Chapter 7 bankruptcy. In Chapter 13, you will be required to make a repayment plan based off of your income, showing how you will pay off your debts in the next three to five years. You can find out more by looking at An Overview of Chapter 13 Bankruptcy.

2. Consider your alternatives. Bankruptcy is not for everyone. Indeed, many unnecessary bankruptcies are filed each year. You should sit down with your financial documents and consider your situation carefully before making a decision. You may find that you do not need to file bankruptcy because you are judgment proof, or that you can fix your financial woes with a few simple changes.

3. Ensure that you are eligible to file for the type of bankruptcy you want to file. There are certain requirements that you must meet in order to file for certain types of bankruptcies. For example, you may not be able to file for Chapter 7 bankruptcy if your income is high enough to pay off your debts through Chapter 13. Also, if your income is too low, or your debts too high, you may not be able to file for Chapter 13 bankruptcy because you cannot show that you are able to meet your repayment plan.

4. Find out what debts will and won’t be forgiven. There are certain types of debts, such as child support, alimony and tax debts, that cannot be wiped out through a bankruptcy proceeding, no matter whether you file Chapter 7 or Chapter 13. Be sure that the debts that you have are types that can be addressed in bankruptcy before you file. It won’t do you any good to file only to find out that bankruptcy will afford you no protection.

5. Figure out what will happen to your home if you file for bankruptcy. Before filing for bankruptcy, you should always sit down and try to figure out what will happen to your home if you do file. If you are already having problems making your mortgage payments, perhaps they will become easier if some of your other debts are forgiven. However, if you have a lot of equity already invested in your home, you may lose your home if you file for Chapter 7 bankruptcy. On the other hand, if your income is high enough, you may be able to file for Chapter 13 bankruptcy and include your mortgage payments on your repayment plan.

6. Figure out what will happen to your other property, like your car. What happens to your other property during a bankruptcy proceeding will depend upon what you have done with your property, as well as the property exemption laws that are available to you. If, for example, you put up your boat or your car as collateral on a loan, this makes that loan secured and the creditor may still be able to take your property even if you are in bankruptcy. Also, only certain types of property are protected by exemption laws in Chapter 7 bankruptcies. Before filing, study the exemption laws carefully and make sure you will keep what you need to survive.

7. Find out if your credit card debts will be wiped out. Bankruptcy has become an effective tool for wiping out credit card debt. You should figure out if your credit card debt will be wiped out by a bankruptcy proceeding before you file. If you lied on a credit card application or spent well beyond your means, bankruptcy may not be able to forgive your credit card debt.

8. Ensure that your pension plans are safe. Most pension plans and life insurance policies are protected by state laws in a bankruptcy proceeding. Before filing for bankruptcy, it would still be a good idea to find out whether your pension plan (401(k), IRA) and/or life insurance policies will continue to be protected.

9. Make sure that any co-signers are not stuck with your debt. You should go back through all of your debt agreements to make sure that no one that co-signed for any of your loans will be stuck making payments on your debt. It does no good to go through an entire bankruptcy proceeding only to find out that your brother or parents are stuck making the payments that you are unable to make. Generally, Chapter 13 bankruptcy will protect any co-signers to your debts, but Chapter 7 will not.

10. Your personal life will be invaded. Bankruptcies are notoriously intrusive into personal lives. In order for bankruptcy to work, you will have to show the bankruptcy court every aspect of your financial life. In addition, other people may find out about your bankruptcy. In Chapter 7 bankruptcy, it is likely that some of your personal property will be taken and sold in order to pay off your debts. Also, in a Chapter 13 bankruptcy, you will probably have to ask permission to spend your own money for the next three to five years.

These are some of the starting points for you to think about when asking yourself, “is bankruptcy a good idea for me?”

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Types of Bankruptcy

In our society today, revisions to the bankruptcy laws and changes in consumer attitude toward bankruptcy have fostered a climate in which individuals and businesses many times regard bankruptcy as a more plausible remedy for financial problems than disciplined financial management.

A revised Bankruptcy Code, enacted in 1978, took effect on October 1, 1979. The Code consolidated some chapters of previous laws pertaining to business reorganizations and sought to streamline the administration of the bankruptcy courts, but its most sweeping changes involved personal bankruptcy. This revision made bankruptcy a more attractive option for both personal and business debtors, primarily because it increased the amount of assets that could be exempt from liquidation.

The revised Bankruptcy Code generally accommodated and regulated three primary kinds of bankruptcy: corporate, personal, and farm reorganization.

Corporate bankruptcy
Corporate bankruptcy laws are extremely complicated. For this reason advice should be sought from a qualified attorney. Generally corporate bankruptcy fits within three chapters of the Bankruptcy Code:Chapter 7, Chapter 11, and Involuntary Bankruptcy.

Chapter 7—If the bankruptcy judge does not believe a company can realistically become viable, he or she can choose to dissolve the corporation or business under Chapter 7 of the Bankruptcy Code. In so doing the business is inventoried and, under the supervision of a bankruptcy trustee appointed by the court, the business is dissolved and the assets sold to satisfy the creditors. In most instances the creditors will receive only a percentage of the original outstanding debt.

Chapter 11—This Bankruptcy Code section details how a corporation or business can file for federal bankruptcy protection and reorganization under its existing management, while it continues to operate as it works out a plan to repay its creditors. Normally a business has three to five years to repay its creditors a minimum of what the creditor would have received if the business liquidated under Chapter 7.

Involuntary Bankruptcy—The Bankruptcy Code permits creditors to file a bankruptcy petition and force a debtor business to answer in bankruptcy court. This procedure allows creditors to force a debtor who has assets but refuses to pay the creditors into court. Although involuntary bankruptcy can be forced on an individual or a business, it is more common with business bankruptcy.

Personal bankruptcy
As with corporate bankruptcy, individual bankruptcy should be filed under the advice and the direction of a qualified attorney. Individual bankruptcy generally is covered in three chapters of the Bankruptcy Code: Chapter 7, Chapter 11, and Chapter 13.

Chapter 7—The purpose of a Chapter 7 bankruptcy is to allow a person to obtain a fresh start, free from creditors and free from the pressures of overwhelming debt. Basically Chapter 7 is a plan for personal financial dissolution. As with a business Chapter 7 bankruptcy, a court-appointed trustee takes possession of all nonexempt property and assets, converts them to cash, and distributes the funds to creditors. Exempt items include specified items, a certain amount of money dictated by the trustee, and some personal effects. Most debtors are able to keep property they need to get on with their lives. After filing for relief under Chapter 7, an individual debtor might, as dictated by the trustee, receive a discharge.

A discharge permanently prohibits creditors from attempting to collect those secured and unsecured debts listed in the bankruptcy filing. These could include past due mortgage or rent payments and penalties, credit card debt, medical bills, or consumer loans. However, some debts are non-dischargeable. These could include some federal and state taxes, school loans, alimony and child support, criminal restitution, or debts for death or personal injury caused by driving while intoxicated from alcohol or drugs. If individuals receive a discharge under Chapter 7, they cannot receive another discharge under Chapter 7 for the next six years.

Chapter 11—Although individual debtors can choose to file a Chapter 11, this type of bankruptcy is extremely complicated, plus there may be advantages to filing under a different chapter. A qualified attorney should be able to advise whether Chapter 11 is judicious.

Chapter 13—Chapter 13 of the Bankruptcy Code is intended to allow individuals to reorganize and operate under court protection from their creditors. Individuals are eligible for Chapter 13 if their debts do not exceed certain dollar limits set forth in the Bankruptcy Code and if they have a steady income.

Under a Chapter 13 bankruptcy filing, a debtor must promptly file a repayment plan and get the court’s approval of the plan. Any creditor may object to the plan. The debtor, along with the court-appointed trustee, must work out any objections to the plan before the court will approve it. The typical repayment term of a Chapter 13 plan is three to five years. The debtor makes regular payments to the trustee, and the trustee then distributes these monies to creditors according to the terms of the plan.

After completion of the plan, the debts listed in the bankruptcy are discharged except for some taxes; alimony and child support payments; student loans; certain debts, including criminal fines and restitution and debts for death or personal injury caused by driving while intoxicated from alcohol or drugs; and certain long-term secured obligations.

Farm reorganization
Chapter 12—The Chapter 12 bankruptcy law was created to help family farmers who need to reorganize their debts, while keeping and working their land. This type of bankruptcy is meant to assist farmers who have the potential to reorganize and to allow them relief from heavy debt burden and at the same time allow farmers to pay their creditors what is deemed reasonable.

The rules for Chapter 12 bankruptcy are modeled closely after those of Chapter 13 bankruptcy. A Chapter 12 case may be filed only by certain family farmers and businesses. A trustee is appointed, but the farmer usually remains in possession of the farm while formulating a plan. A farmer may choose to convert a Chapter 12 case to a Chapter 7.

God’s Word clearly says that believers should be responsible for their promises and repay what they owe. “When you make a vow to God, do not be late in paying it, for He takes no delight in fools. Pay what you vow! It is better that you should not vow than that you should vow and not pay” (Ecclesiastes 5:4-5). But in the meantime individuals or businesses may be faced with no alternative other than to seek court protection from creditors. However, court protection is the last alternative. A Christian must be willing to accept the absolute requirement to repay every debt. Even after discharge, if the creditor allows the debt to be paid, the debtor needs to arrange to pay off the debt, even if it takes an entire lifetime to satisfy the debt.

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Stuff you need to consider before filing Chapter 7 bankruptcy

Filing bankruptcy is not at all an easy task. There is so much more to be considered that, it becomes hard for you to file one, without having the details on the same. Furthermore, you will have to consider the process which you may have to follow, in order to file bankruptcy. Now, if you are planning to file bankruptcy under Chapter 7, you will have to know all of the details in relation to it. You may also be required to take the help of a Chapter 7 bankruptcy attorney.

Things to know about Chapter 7 bankruptcy

There are various important things which you will have to know, in order to make sure that you aren’t making a mistake in filing Chapter 7 bankruptcy. In case of Chapter 7, you lose almost all of your assets in the process of getting a discharge, from all of your debts. Therefore, you will have to:

1.      Get the details of Chapter 7 bankruptcy – You need to get all kinds of details on Chapter 7 bankruptcy. Chapter 7 bankruptcy is known as the liquidation process, where the bankruptcy trustee liquidates all of your assets. This is done in order to pay your creditors and lenders, for you do not have the money to pay them.

2.      Opt for credit counseling – If you are going to file bankruptcy, it is important for you to obtain a credit counseling session. In case of Chapter 7 bankruptcy, it is a must. So, it would be better for you to get a credit counseling done, before filing Chapter 7.

3.      Determine if you are eligible for Chapter 7 – You will have to determine if you are at all eligible to file for Chapter 7 bankruptcy. Not all are eligible to file under Chapter 7. You will be required to apply for Means Test. If your income is more than that of the average income of the state you are in, you may not be allowed to file under this Chapter. Your income will have to be lower than the average income of the state you are in.

4.      Can you part with the assets – You will have to determine, if you are ready to part with your assets and belongings. As Chapter 7 is a liquidation process, you will have no option to save the assets. The bankruptcy trustee will take away your assets, sell those off to use the cash for making the payments to your creditors. In fact, all of your assets may be liquidated. Still, it depends on the debt amount you owe, to your creditors.

5.      Can you afford the cost of bankruptcy – You will have to find out if you can at all afford to make payments, against the cost of bankruptcy. Filing bankruptcy can cost you quite an amount, and it may not be possible for one and all to afford the same. A person already in financial hardship, may not have the money to file bankruptcy. So, the cost of bankruptcy is quite an important issue.

6.      Bankruptcy’s effect on credit – You need to consider the effect of bankruptcy on your credit. It has a hugely negative effect on your credit score. It can lower your credit score in the range of 200-350 points. So, getting back in the right form is going to take time. It won’t be possible for you to obtain any form of new credit, immediately after bankruptcy. It may take you more than 2 to 3 years to get back on track.

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The Power Of Automatic Stay In Bankruptcy

Are you aware of its benefits and drawbacks? 

Automatic stay is considered to be one of the essential benefits of filing bankruptcy. This automatic stay is granted by the bankruptcy court and it protects the filers from further creditor harassment. The filers who are constantly harassed by the creditors to retrieve the owed amount can reap the benefit from the automatic stay.

The stay protects the filers by stopping any legal proceedings that are filed against them by the collection agencies to retrieve the owed amount. Therefore, automatic stay stops lawsuit against you and most of the action against your property by the creditors or collection agencies. So, automatic stay is one of the reasons to file bankruptcy if the debtors are evicted, being foreclosed on the property and so on.

What is the power of automatic stay in bankruptcy?

Under section 362(a) of the bankruptcy code, the automatic stay states that the honest debtors planning to start afresh may find a solution to their problems with automatic stay. If the debtor files bankruptcy and the court grants automatic stay, then it may free the individual from any collection activities. But people who owe the debt once the bankruptcy process is completed, like the student loan or tax debt, these debts can’t be collected as long as automatic stay is in place.

As a matter of fact, filers are required to know that the automatic stay isn’t permanent and it doesn’t claim that bankruptcy proceeding will be successful. The main purpose behind placing automatic stay is to provide breathing room while an individual goes for Chapter 7 liquidation or Chapter 13 repayment plan.

What are the specific use of automatic stay?

Here are some points that the automatic stay prevents:

1. Prevents Foreclosure: If the creditors plan to foreclose on your property, then the automatic stay may stop the proceedings. However, the creditor can start withforeclosure proceedings in course of time after the completion of the bankruptcy process if the debt is not paid off. In case, you’re facing foreclosure, filing under chapter 13 bankruptcy is a better option than Chapter 7 bankruptcy, if you want to keep your home.

2. Collection of overpayments of public benefits: If you receive overpayment of public benefits, then the agency is entitled to collect the overpayment out of the future checks. But the automatic stay placed due to bankruptcy prevents the collection.

3. Stops wage garnishment: Filing bankruptcy stops more than one wage garnishment. In the course of time, you can manage to discharge your debts as well as prevent collection activities.

What automatic stay can’t prevent?

Here are some of the points that automatic stay can’t prevent:

1. Tax proceedings by IRS: The automatic stay can’t stop the IRS from issuing a tax lien or seizing your property.

2. Can’t prevent support actions: You can prevent child support collection or alimony by filing bankruptcy.

3. Can’t prevent repayment of loan from a pension: Automatic stay does not prevent repayment of a loan from certain types of pensions.

Therefore, you’re considered the benefits as well as drawbacks of automatic before filing bankruptcy. The benefits of the automatic stay may overshadow its drawbacks when you file for bankruptcy.

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