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Bankruptcy - A Way to eliminate or Reorganize your debts

Posted on: 08th Apr, 2004 04:10 am
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.

Related Articles

Related Forum Discussions
How do i declare bankrupcy?
Posted on: 09th Nov, 2005 02:38 am
Hi Peter,

Welcome to the forums,

There are two ways to declare your bankruptcy. First one file a petition to voluntarily go bankrupt. This is more common. Another way which is not used often is for creditors to ask the court to make a order to that the person is bankrupt.

God Bless You,

Posted on: 09th Nov, 2005 02:48 am
Will my spouse get affected due to my bankrupcy?
Posted on: 17th Nov, 2005 08:43 pm

Welcome to MortgageFit Forums,

Once you are in MortgageFit you need not worry.

Your spouse will not get affected if he or she is not responsible for any of your debt.

But in community property states either of the two (husband and wife) can contract for a debt without the signature of his or her partner on anything. Like day to day debts do not require both spouses to have signed. Still there are exceptions to it like sale and purchase of real estate will require signatures of both spouses.

Your attorney can help you in a better way in this regard.

God Bless You.

Posted on: 17th Nov, 2005 08:58 pm

Thanks for attending my question Samantha. Can you tell me which are community property states.
Posted on: 17th Nov, 2005 09:13 pm

There are many community property states like Arizona, Idaho, California, Nevada, New Mexico, Texas, Washington, Wisiconsin, Louisiana

God Bless You.

Posted on: 17th Nov, 2005 09:19 pm
I am bankrupt and i am about to file bankrupcy but i want to know that whether all my debts be wiped out once i file bankrupcy?? and if not what are those debts?? any feedbacks are appreciated.
Posted on: 22nd Nov, 2005 09:09 pm

As far as i know lot of your debts will be wiped off but not all there are some debts that will not get wiped even if you file bankrupcy.

Posted on: 22nd Nov, 2005 10:15 pm
Hi Dylan,

Welcome to MortgageFit Forums.

As jerry said there are some debts that do not gets wiped off even if you file bankruptcy like back child support, certain kind of tax debts and alimony.

Student loans will also not get discharged unless you are able to show that repaying the loan will be a undue burden. And believe me this is a very tough standard to achieve.

God Bless You.

Posted on: 22nd Nov, 2005 10:18 pm
Hi! Filed Chap. 13 bankrupcy Oct. 2003. My attorney died April 2004. HIs former partner agreed to watch over his cases. My employment changed but I kept making payments, though the date I paid monthly changed a few times. I was told this didn't matter as long as I got the payment in within each month. Because the office delays posting payments upto 3 days, some months didn't show as being paid, which promted a review of my account. They say over the life of the case there is a $1500 shortfall of what I should have paid in vs. what's been paid. My date to appear is 1/11/05 and I only have $800 of the $1500 needed by Wed. My next payday is on the 15th (13th due to the holiday). Do the courts judges ever show any leniency or will they allow the case to remain open and let me pay the balance a few days later? What recourse do I have if they throw it out? (The case would be complete by Novemebr 2006 if allowed to continue) I'm so stressed...HELP ???
Posted on: 07th Jan, 2006 10:47 am
Hi Willnjoy,

It's a hard time you are facing but I feel you will come out of this problem with your honesty.

If you can clearly explain your problem in and give them proof of your difficulty, then there is every possibility that the court may give you time.

Consult with your attorney on the approach you need to make. Don't break down. I am sure your problem will get solved.

Posted on: 07th Jan, 2006 11:11 am
Hi Willnjoy,

Welcome to MortgageFit Forums.

I don't feel there is any fault on your part to be charged for. This is really painful to see that in spite of making payments on a regular basis you are having tough times.

I shall advise you to talk to your attorney and get the evidences of your payments. He can suggest the best possible way to explain things in the court in full.

Since you are honest and sincere in your approach, there is no reason the court will force you anything. Things should be explained clearly and convincingly.

Take help of your attorney always in the process and I sincerely believe that you will come out successfully from this problem.

God bless you,

For MortgageFit,
Posted on: 07th Jan, 2006 11:31 am
I live in Arizona and I am thinking about bankruptcy, but I have been paying IIM for the past 6 months and I still do not see any changes. It will take me until 2012, I think, to pay off my debt of $12, 000 or more. Any advice?
Posted on: 17th Feb, 2006 12:08 pm

Welcome to MortgageFit Forums.

Can you be more elaborate on why you are thinking about bankruptcy?

God bless you.

For MotgageFit,
Posted on: 17th Feb, 2006 12:43 pm
i have a credit card that i fell behind ion the company has hired an attorney to settle this dept, they want to go to court, they will not work out a pymt arrangement, my name is on the house the morg. is in my husbands name, can they put a lien on the house or come after my husband, the card is in my name only.
Posted on: 26th Jul, 2006 04:25 pm
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