Bankruptcy - A Way to Eliminate or Reorganize your debts

Bankruptcy helps to eliminate a part or whole of your debts and/or offers a payment plan with which you can pay back debts under the supervision of the court. When you declare bankruptcy, it puts an automatic stay on any legal action (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.

If you're unable to manage your debts and need to eliminate or reorganize them, you may consider declaring bankruptcy. Given below are conditions when you may declare bankruptcy.

• You're paying the minimum on your bills
• More than one account are in collection
• The lender is about to declare foreclosure
• You've lost your job recently
• Cannot budget and get out of debt in next 5 years

The discharge is a court order releasing the debtor from the personal liability of paying off debts. The discharge order is issued after 4 months of filing Chapter 7 bankruptcies and 3-5 years of filing Chapter 13 bankruptcies (30-60 days after your final payment).

Once the discharge order is issued, it stops creditors from any collection actions or personal communication through phone calls, letters or mails. In case of secured debts (mortgage or car loan) included in bankruptcies, the discharge order does not remove liens on your property. So, the lender can carry out a foreclosure after the automatic stay is lifted. To avoid a foreclosure, you can sign on a Reaffirmation Agreement (for exempt equity) and start paying your mortgage again.

Instead of filing bankruptcy on your own, it's better to take help of an attorney who'll guide you throughout the process. There are 4 steps to filing or declaring bankruptcy. These are:

• Deciding which Chapter to file
• Enrolling for Credit Counseling
• Means Test
• Filing docs with financial statement

For more details on how to declare bankruptcy, check out the information on bankruptcy filings.

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 mail with details on the case number, automatic stay, name of your trustee and the date for meeting with creditors.


2. Meeting with creditors: Within the next 20-40 days, the court holds the 341 Meeting with your creditors and trustee. Here, you'll have to answer the trustee's questions on assets, debts etc. The creditors will then question you under oath. Your attorney will negotiate with them if required.


3. Trustee's role: Within 30-40 days of the filing, the trustee determines if your assets can be liquidated to pay the creditors. If it's Chapter7 and all your assets are exempt (protected under bankruptcy law), a no distribution report will be filed at the court. But if there are non-exempt assets, the trustee sells them off in order to pay your creditors. In case of Chapter 13, the trustee reviews the payment plan you've proposed for approval.


4. Creditors may challenge discharge: By the 60th day of the filing, your creditors can file a lawsuit or challenge the discharge of your debts.


5. Creditors file claims: By day 90 (after the 341 meeting), creditors should file their claims against you (the debtor).


6. Financial Management course: You need to go through a personal financial management course as arranged by your attorney. This will make you eligible for the discharge.

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 home equity (fair market value minus liens) 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
You can choose Federal exemption irrespective of how long you're living in the state. The Federal exemption is limited to equity worth $125,000 if the property has been acquired within 1215 days prior to declaring bankruptcy.

In states where Federal exemptions are not available, filers can use the current state's exemption if they lived in the state for at least 2 years. Those who haven't lived in the state for at least 2 years can use the exemption of the state where they have stayed for the majority of the time for 180 days before the 2 year period.

If your home equity is higher than the state exemption, then the trustee will sell your home. He'll offer you the exempted amount and pay off the rest to your lender after deducting his fee. If you still owe money on the house, then you can reaffirm the debt and continue to pay under the existing terms and conditions. Another option is to redeem the house by buying it from the lender through a single payment for its current value.

However, if you have sold off non-exempt assets in 10 years prior to the filing in order to protect them from your creditors, then your exemption will be reduced by the value of those assets.

There are certain debts which cannot be discharged by filing a bankruptcy. These include:

• Student loans
• Back taxes
• Fraudulent debts
• Alimony
• Child support
• Large purchases
• Government penalty

Filing bankruptcy gives you a fresh financial start as it helps to eliminate or restructure your debts so that 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.