by Amy Lillard
(2/9/2013) Over the last decade the unprecedented rise and fall of our economy, increasingly referred to as the “Great Recession,” has had far reaching effects. For companies and individuals, dire financial straits has resulted in more foreclosures, repossessions, loan defaults, and other disastrous financial situations. It’s no wonder that bankruptcy is increasingly discussed and used.
Bankruptcy, the process of declaring your inability to make good on debts in order to have those debts forgiven, has long had a stigma from widespread misunderstanding and misconception. The decision to declare bankruptcy is extremely serious, with short and long-term consequences. It is, however, a viable option for some at their last rope, one that needs clarification and clear details.
Who can file?
Bankruptcy was designed as an important alternative for individuals and businesses who are in over their heads with debt. It acts as a formal declaration to creditors that although the credit arrangement was entered into with the intention of pay back the debt, the individual or business cannot pay.
Bankruptcy is an option open to everyone, but should only be considered after other options have been exhausted. The process can be invasive and expensive, and is only allowed every 8 years. In addition, bankruptcy stays on your credit report for 10 years, negatively impacting your credit score and ability to obtain loans and other credit.
For these reasons, the American Bankruptcy Institute suggests bankruptcy as a possible avenue only for those individuals with urgent and pressing financial problems, characterized by:
• Debt in unsecured loans, including credit cards or healthcare bills
• Frozen accounts or garnished wages after legal judgments
• Collection agencies calling
• Lawsuits filed against them
Deciding to file
It’s critical to understand the scope of bankruptcy before deciding to file. Contrary to many assumptions, bankruptcy doesn’t necessarily eliminate all debt. Plus, there are two types of individual bankruptcy options to choose from, both of which represent different solutions.
Generally, bankruptcy can discharge most debts, removing the legal obligation to pay. In addition, bankruptcy can stop:
• Foreclosure proceedings on a home
• Repossession of cars and other property (and mandate the return of repossessed property in certain situations)
• Wage garnishments
• Debt collection calls
But there are limits to bankruptcy laws and protection. Certain kinds of debt will not be covered, including child support, alimony, certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and most taxes. It does not remove the obligation and responsibility of cosigners on loans. And perhaps most importantly, it does not provide a free pass in the future - debts incurred after bankruptcy has been filed must be paid as normal.
Types of filing
There are two main types of bankruptcy available to individuals. Each provides for different types of debt discharging, and each features different rules and exclusions. It’s critical to understand each before deciding to file in order to help make your decision and guide your process.
Probably the most well known and most common type of bankruptcy, Chapter 7 bankruptcy (named after the chapter of the legal bankruptcy code in which it is detailed) eliminates all unsecured debt. With this type of debt, a creditor does not have a lien on any property and there is nothing to repossess in case of nonpayment.
Chapter 7 bankruptcy forgives debt for all credit cards, mortgages for homes you no longer want, car loans on repossessed vehicles, certain taxes, and medical bills. Certain other property owned by the filer may be taken to pay creditors, which is why most people with assets they want to keep avoid this type of bankruptcy.
Individuals who file for this type of bankruptcy must also meet income qualifications, typically translating to this option being used by people with lower income and fewer assets. Your average monthly income over the last six months must be less than or equal to your state’s average income.
Chapter 13 bankruptcy provides for less exhaustive debt forgiveness. Instead of wiping out debt, this type provides for an arrangement in which filers will repay some or all of covered debt, usually over a 36-60 month period. Filers can keep their property in this type of bankruptcy.
Because of these stipulations, people choose this type of bankruptcy if they have too much income for Chapter 7, or want to forestall foreclosure on homes they want to keep. Chapter 13 will stop foreclosure and force lenders to accept repayment plans.
The final type of bankruptcy is well known to many, especially in recent years. Businesses who are unable to pay their debts but need to keep operating can file for Chapter 11 bankruptcy. In this case, revenue and expenses are monitored by a trustee, and companies are protected from lawsuits, freezing assets, and other business killers.
The filing process
The process of filing for bankruptcy is lengthy, complex and comprehensive, involving multiple forms documenting your assets and outstanding debts. And mistakes can be very costly in terms of time and money. For these reasons experts highly recommend using a lawyer to assist and guide in the process.
Filing will involve at least one court hearing called the “meeting of creditors.” At this meeting you will be required to answer questions about your financial status from officers of the court and from the representatives of your creditors. The questions may be probing, and complete honesty is required.
As part of the bankruptcy filing process, you may be required to participate in credit counseling. This is a proactive measure designed to help you practice smarter financial behaviors in the future, and prevent similar financial difficulties from arising again.
Filing will incur a nominal court fee of approximately $200, and any associated lawyer fees for their time. The process will be typically be completed within 4 to 6 months from filing it, but in the case of Chapter 13 bankruptcy the process could last much longer.
Final thoughts on filing
Filing for bankruptcy is not for the unprepared, and it is not a simple undertaking. Remember that to qualify for the debt forgiveness benefits that bankruptcy can provide, you must:
• Be honest. Total and complete disclosure of all assets and financial details is required for a successful bankruptcy filing. And this can sometimes happen in a very public way, which can cause some people discomfort and embarrassment. But the penalties for discovered dishonesty could include investigation by the FBI for federal charges.
• Understand it’s personal. Debt forgiveness through bankruptcy is specific to you, not the debt. That means any co-signers on the debt may still be counted responsible for repayment. Be sure you understand how this affects any people who have agreed to help you along the way by co-signing loans or credit cards.
• Watch out for credit offers. After qualifying for bankruptcy, people may think they’ll never get offered credit again. But the truth is credit card offers won’t stop. They’ll just be very high interest rate credit cards. Beware of obtaining this type of credit, as it can easily escalate into an uncontrollable debt situation again.
Filing for bankruptcy can be a difficult decision, but one that’s simpler when you understand the facts. If you’re considering filing for bankruptcy, do your research in the basics and be sure to talk to an experienced bankruptcy attorney.
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