Bankruptcy - A Way to eliminate or Reorganize your debts

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If you're in financial crisis and cannot repay your debts, bankruptcy may be the solution to your debt problems. To learn what bankruptcy is and how it may work for you, check out the bankruptcy information below:

What is bankruptcy?

Bankruptcy helps to eliminate a part of your debts and may offer a payment plan where you pay back your debts with court supervision. When you declare bankruptcy, the court puts an automatic stay on any legal actions (collections, garnishment, foreclosure etc) taken by creditors/lenders due to non-payment of debt.

There are personal and business bankruptcies. The most common types of personal bankruptcies are Chapter 7 and Chapter 13.

When should you file bankruptcy?

If you're unable to manage your debts and need to eliminate or reorganize them, you should consider declaring bankruptcy. Below are the conditions when you should declare bankruptcy.
  • You're making the minimum payments on your bills.
  • More than one account is in collection.
  • The lender is about to foreclose on your home.
  • You've recently lost your job.
  • You have tried other debt solutions and they haven't worked.

What is a bankruptcy discharge?

A discharge is a court order releasing the debtors from the personal liability to pay off their debts. The discharge order is usually issued 4 months after filing Chapter 7 bankruptcy and 3-5 years after filing Chapter 13 bankruptcy (30-60 days after your final payment).

The discharge does not remove any unpaid liens placed on your property before you filed for bankruptcy due to default on a secured debt (a mortgage or car loan). So, the lender can carry out a foreclosure after the automatic stay is lifted. To avoid a foreclosure after your Chapter 7 bankruptcy has been discharged, and keep your home, you should sign a Reaffirmation Agreement (for exempt equity) and continue paying your mortgage.

How to file bankruptcy

Instead of filing bankruptcy on your own, it's better to get help from an attorney who'll guide you through the process. There are 3 steps to filing for bankruptcy. They are:
  • Deciding which chapter you can file for under the Means Test.
  • Enrolling for Credit Counseling.
  • Filing the court documents, including a financial statement.
For more details on how to declare bankruptcy, check out this information on filing for bankruptcy.

What happens after you declare bankruptcy?

Take a look at the bankruptcy information given below and get an idea of what happens after you declare bankruptcy.
  1. Creditors are notified: Within 14 days of declaring bankruptcy, the court notifies your creditors about the filing. The court sends a copy of your bankruptcy petition, including a notice that the automatic stay has been put in place, the name of your trustee, and the date when the 341 creditor meeting has been set.

  2. 341 Meeting with your creditors: Between 20-40 days after filing, the trustee holds a 341 Meeting with your creditors. You are required to attend and answer any questions put to you under oath.

  3. Trustee's role: In a Chapter 7 bankruptcy case, the trustee takes a look at your assets and determines which ones your state law exempts from being sold. Any nonexempt assets are sold off to pay your debts. In a Chapter 13 bankruptcy case, the trustee negotiates with your attorney and creditors to work out a repayment plan you can afford.

  4. Creditors may challenge the discharge: Your creditors have 60 days from the 341 meeting to convince the court you should not be able to discharge their debt.

  5. Financial Management course: Under the 2005 changes to the bankruptcy code, you are required to enroll with a court approved credit counseling service within 180 days before you file for bankruptcy.

Can you keep your home after filing bankruptcy?

You'll be able to keep your home if you've filed Chapter 13. But if you've filed Chapter 7, you may or may not be able to protect the equity in your home from your creditors/lenders. There are Federal and State Homestead exemptions. If your equity is less than the exemption, then you'll be able to keep your home.

Federal and State Exemptions
Some states permit their citizens to use the Federal exemptions, while others do not. Every state court requires an individual filing for bankruptcy in their state to have lived there for at least 2 years or to have lived in that state for the majority of the 180 days before the 2 year period in order to use their exemptions.

If you have more equity in your home than the state homestead exemption allows, then the trustee will sell your home. You will get an amount equal to the exemption, and the rest will go to pay off your debts, including your court costs. If you are still paying on your mortgage, you may reaffirm your mortgage and exclude your home from your bankruptcy estate.

However, if you have sold or transferred property to another person in order to avoid losing that property in bankruptcy, then you may lose part of an exemption or have your bankruptcy petition denied.

What debts are not discharged?

There are certain debts which cannot be discharged by filing for bankruptcy. These include:
  • Student loans
  • Back taxes
  • Fraudulent debts
  • Alimony
  • Child support
  • Large purchases
  • Government penalty

Pros and cons of declaring bankruptcy

Filing bankruptcy gives you a fresh financial start and helps to eliminate or restructure your debts so you can manage your finances well. However, when you file Chapter 7, it hurts your credit score. But Chapter 13 has a positive effect on your score as you can repay all or part of your debts. Thus, bankruptcy isn't always bad. What's important is to understand how bankruptcy works and which Chapter would suit you the best.

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In 341 meeting a creditor questions a debtor under oath by creditor or a trustee about his or her financial affairs. It is mandatory for the debtors to appear in the meeting but it is not so for creditors. If debtors don't turn up for the meeting their case may be dismissed. An 11U.S.C 341(a) meeting of creditors gives the opportunity to creditors and other interested parties to enquire about the debtor's financial condition.
The New Bankruptcy Law requires a debtor to attend credit counseling sessions for 6 months before filing a petition. The bankruptcy lawyer assists the debtor in finding out a suitable credit counselor. Steps in the bankruptcy process: The debtor files a petition, that is, either Chapter 7 or Chapter 13 with the bankruptcy court. A stay order is issued by the court so that all collection actions by creditors are stopped. The wages of the debtor cannot be cut down and no legal action can be taken against him. The clerk informs the creditors that the debtor has filed bankruptcy. At least 7 days prior to the 341 meeting, debtors must provide the trustee a copy of a tax return for the time period for which the return has been due most recently. The creditors and the debtors attend a meeting with the court (341 meeting), although it is not mandatory for the creditors to participate in the meeting. In case of Chapter 7, the trustee sells off the non-exempt assets of the debtor for paying off the creditors. Whereas with a Chapter 13 the court reviews a repayment plan for debtors. The debtors provide a statement of intent regarding secured property within 30 days after the completion of the first creditors' meeting. Failure to redeem the property or go for debt reaffirmation within 45 days after the 341 meeting makes the automatic stay order ineffective. Creditors can now take back the assets from the debtors under the provisions of the law. Creditors of unsecured debts should file their claims after the 341 meeting. The bankruptcy lawyer recommends a financial management course for the debtors so that they are eligible for a discharge. In case of Chapter 7 filing, the court issues a Discharge Order within 60 to 90 days from the meeting of the creditors. But in case of Chapter 13 bankruptcy, the debtor is discharged only after he pays off his debts through a repayment plan approved by the court.
If your creditor attempts to go for debt collection although you have been allowed an automatic stay, then you should inform him about it. You should also state in writing that you have filed bankruptcy. Also, give him the case number, filing date and a copy of the petition that can prove that you have filed the case. If the creditor still continues to do so, then the debtor has the right to take legal action against the creditor. He can obtain a specific order from the court prohibiting the creditor from taking any further collection action. And if the creditor is willfully violating the stay, then the court may hold the creditor for contempt of court and punish the creditor by fine or imprisonment. Such legal action brought against the creditor will be complex and will generally require representation by a qualified bankruptcy attorney.


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