Bankruptcy: What You Need to Know Before You File
If you are thinking of filing for bankruptcy,
there are facts you need to know before you make a
decision.
First, understand that filing for bankruptcy
should be a last resort if you have borrowed money
and have absolutely no way or repaying it. Filing
for bankruptcy will have a very negative effect on
your credit history for 10 years or longer, and may
also impact your quality of life.
If you do declare bankruptcy, you will
need to file with the bankruptcy court a complete
list of all your outstanding debts and of all your
assets. Your assets will fall into one of two categories:
Exempt and non-exempt. Exempt assets are those that
you do not have to use to repay your debts. Generally
speaking, this includes the equity in your home, a
certain amount of equity in your automobile(s), a
small amount for clothing, and a small amount for
personal items.
The court will then appoint a bankruptcy
trustee to oversee the payment of your debts. These
debts will also fall into one of two categories: Secured
and non-secured.
Secured debts are those in which the
creditor has a security interest in the property usually
property that was purchased with the credit. Examples
of this might include items such as a fishing boat
or a second home.
Non-secured debts include credit cards
and any loans not secured by real property.
Secured debts take precedence over non-secured,
meaning that the secured debts must be paid off first.
If you cannot pay off a secured debt, your creditor
can take back the property in which it has a secured
interest.
Once you have filed all necessary paperwork
with the bankruptcy court and have been appointed
a trustee, the court will issue an automatic stay.
This prevents your creditors from taking any further
action against you outside the bankruptcy case. This
protects your from repossessions and foreclosures.
Chapter 7 vs. Chapter 13 Bankruptcy
There are significant differences between
a Chapter 7 and a Chapter 13 bankruptcy.
A Chapter 7 proceeding is a liquidation
proceeding where you are allowed to keep only your
exempt property. All of your non-exempt property is
then sold to pay your debts. If you have dischargeable
debts, such as money owed on credit cards, these debts
will be discharged. However, some debts, such as child
support, student loans and taxes are usually not dischargeable
in a Chapter 7 bankruptcy.
In comparison, a Chapter 13 bankruptcy
is a reorganization bankruptcy. Choose this type of
proceeding if your goal is to pay off your debts over
a period of three to five years. This type of bankruptcy
is usually chosen by people who want to keep their
non-exempt property or who want to catch up on past
bills to avoid a repossession or foreclosure.
However, a Chapter 13 bankruptcy is
really an option only for people who have enough of
a predictable income to pay off their debts in a reasonable
amount of time, and to have money left over for living
expenses.
Once both you and your creditors agree
on a repayment plan under Chapter 13, and the bankruptcy
court approves it, both you and your creditors are
bound by it.
Congress recently passed new laws making
it more difficult for individuals to declare bankruptcy.
This means you need to be sure to discuss bankruptcy
with a reputable and knowledgeable attorney before
filing.
Declaring bankruptcy is not an easy
thing. But given the right circumstances, it can offer
both debt and stress relief.
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