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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
Hi,

The company cannot claim your house. However, they can have a lien put on it. The reason is that if the house is ever sold, they get their money.
Posted on: 26th Jul, 2006 04:32 pm
Hi Kay,

Don't get scared. The primary mortgage holder can only force someone out of the home which requires foreclosure proceedings in the court.

The most that a CC company can do is to get a judgment from the court against you and put a lien on your house.
Posted on: 26th Jul, 2006 04:37 pm
hi again, what is i do a quick claim, the card is in my name only, can they go into our checking account?
Posted on: 28th Jul, 2006 01:17 pm
Hi Kay,

Transferring your property will not free you from your liabilities. You can quit claim the house but your debt remains as it is.

So far it remains outstanding your credit is going to be damaged severely. Why don't to take your time and make a fresh budget to start paying off your CCs?

Why are you in such panic? :)

James
Posted on: 28th Jul, 2006 01:29 pm
i spoke to a lawyer yesterday, he told me since im being sued by a cc company i shouldnot quitclaim my part of the house to my husband because they will come after him, i dont know how they can do that hes not responsible for my dept.
Posted on: 08th Aug, 2006 12:27 pm
Hi,
As you people have a mortgage on the home, first the company will have to pay off the lender on your home and then foreclose, but under most conditions they will not be able to foreclose as long as you keep the payments regular to your lender.
Posted on: 08th Aug, 2006 01:18 pm
Hi Kay,

There is no need to quit claim the property. The credit card company can only place a lien on your property if the legal document states that the card is secured by your property.

Similar will be the case with your checking account. If the document states that on default, money will be retrieved from your checking account, then only the funds from your account can be used to repay the credit card debt.

Thanks,

Caron.
Posted on: 08th Aug, 2006 08:59 pm
hi again, in court if i set a payment arrangement can they put a lien on my property, i am not on the loan i was put on the house as a gift, the card is in my name only, i dont understand if a quitclaim my share to my husband, how can they go after him its not his dept?
Posted on: 09th Aug, 2006 04:53 pm
Hi Kay,

Welcome back.

If you set up a payment arrangement, then you can prevent collection. But in no way can they put a lien on the property. Even if you quit claim your share to your husband, I don't think they should go after him. This is because the card is in your name after all.

Thanks,

Caron.
Posted on: 09th Aug, 2006 08:39 pm
hi again, the lawyer told me if i quitclaim my half to my husband, they can come after him, its a fraudulant act, and i no longer will be exempt, i received papers from the sheriff they are suing me for the dept on this credit card, will they put a lien on my property if i make a pymt arrangement with them to secure the arrangement? :oops:
Posted on: 14th Aug, 2006 03:55 pm
Hi Kay,

If you make a payment arrangement with the credit card company, I don't think they will put a lien on your property. Also, you have a mortgage against the house, and the lender can put a lien when you default on the mortgage payment.

Thanks,

Caron.
Posted on: 14th Aug, 2006 09:14 pm
I was in car accident in 2004 and had surgery 2005 and 2006 as a result of this accident. Because I was off from work each year for about 3-4 month I got behind in my bills. I was off work from 7-7-06 until 10-09-06 with no pay I have tried to avoid bankruptcy but I just can't see my way out. I am in about 21,000.00 of debt this is ruff estimate wshould I file chapter 7 or 13
Posted on: 03rd Jan, 2007 10:27 am
Hi Pat,

Sorry to hear about the problems you are facing.

Before filing for bankruptcy you will be required to undergo credit counseling. It will be used to check if you are in a position to pay a certain percentage of the debt or not.

And also a Means test to determine filing which type of bankruptcy will be appropriate for you.

David
Posted on: 03rd Jan, 2007 10:48 am
If I file will my furniture be taken it is one of the bills I can not pay
Posted on: 03rd Jan, 2007 10:50 am
under chapter 7, your non-exempt property will be sold to pay off the dues.

and in chapter 13, your debts will be restructured and a suitable payment plan will be formed which you can afford to pay off the debts within a specific time frame.

as such it all depends on which chapter you qualify for. also let me suggest that you try to enroll into any form of debt consolidation program before finally deciding on filing bankruptcy.

lay hurst
Posted on: 03rd Jan, 2007 03:34 pm
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