Consumer Bankruptcy

If you are an individual, and do not own a business, there are 2 types of bankruptcy you may pursue: Chapter 7 and Chapter 13 bankruptcy. Which one is right for you is highly dependent on your personal situation.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is known as liquidation because it involves the elimination of most of a person's debt, and the forced sale of the debtor's non-exempt property in order to pay off some of the debt. However, in every state, a person's property, up to a certain dollar amount, is exempt. In many cases, debtors find that the total value of all their property is well under the maximum exempt amount, essentially meaning that they get to keep all of their property, while erasing most of their debt.

Of course, bankruptcy should not be viewed as a "get out of debt free" card. It has serious consequences. First of all, if you have a large amount of assets (more than the maximum exemption amount), you will have to choose which ones you want to keep. The rest will have to be sold to pay your creditors as much as possible.

However, once this happens, most of your unsecured debt is indeed discharged. But your credit rating will take a significant hit, making it much more difficult to get a home loan or credit card in the future. Also, your bankruptcy will appear on your credit reports for 10 years, and you will be prevented from again filing for bankruptcy for 8 years. Furthermore, if any of your debt is secured (has some type of collateral attached to it, such as a car loan), you may have to give up the item that secured the debt (the car, in the case of a car loan). However, you can enter a new agreement with the creditor that allows you to keep the security, as long as you keep making payments on it.

You should also know that some types of debts can't be discharged in a Chapter 7 bankruptcy. These include:

  • student loans
  • criminal fines
  • recent taxes
  • child support
  • alimony
  • civil judgments that result from personal injuries caused by drunk driving

To file for Chapter 7 bankruptcy, you need to fill out a petition and file it with the U.S. Bankruptcy Court in your area. You will also need to provide the court with an accounting of your assets, debts, and income. You then have to take classes from approved providers on personal financial management, to help prevent you from needing to file for bankruptcy again.

Chapter 13 Bankruptcy

Chapter 13 Bankruptcy is very different from Chapter 7. Chapter 13 does not allow you to completely erase your debt. What it does do is restructure your debt, so that you can pay it off over a longer period of time, in installments that are much more manageable than they currently are. It may also result in the debtor being relieved of their obligation to pay at least some of their debt. In many situations Chapter 13 lets you keep all of your property, even if it would not be exempt under Chapter 7.

Chapter 13 bankruptcy is a good option for people who have a lot of valuable, non-exempt property which they do not want to part with. Because it also requires you to make regular payments, Chapter 13 is really only an option for people who have a steady income, but whose current income is not enough to meet their debt obligations as they're currently structured.

Important Changes to Bankruptcy Law

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, making it much more difficult for consumers to file for Chapter 7 bankruptcy.

One of the most important additions to the law is the "means test." If your income is more than the median income in your state, it will be very difficult to obtain Chapter 7 bankruptcy. Furthermore, the debtor is required to meet with an approved credit counselor (at their own expense) prior to filing for bankruptcy. Also, if your bankruptcy application is approved, you will have to attend another class (again, at your own expense) before it can take effect, and discharge your debt.

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