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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
Wife received house in divorce. Ifiled bankrutcy chapter 7 and listed Wells Fargo in bankruptcy and was discharged. Credit report showed bankruptcy and then trans union showed the loan again under a new loan #. Wife has been paying mortgage until recently and now wells fargo says I reaffirmed mortgage and refuses to fix credit and are now foreclosing. I never signed any paperwork. Ex wife lives in house and was paying. What do I do. They refuse to accept or acknowledge my bankruptcy back to 1994.
Posted on: 16th Feb, 2011 01:35 pm
Hi Guest!

Welcome to forums!

If you have documents related to the bankruptcy filing and discharge, you should send a copy of it to the credit bureau. This will help them in updating your credit report.

Feel free to ask if you've further queries.

Posted on: 16th Feb, 2011 10:05 pm
I am married but want to file solely . my wife is not a cosigner on our mortgage loan but did have to sign the deed? will she have to file also?
Posted on: 17th Feb, 2011 08:06 pm
Welcome matthew,

Your wife won't have to file bankruptcy along with you. You will be able to file it on your own.
Posted on: 17th Feb, 2011 11:50 pm
We filed chapter 7 bankrupcy last Sept 2010 & it was discharged Dec. 2010. We do not want to keep the house. We have moved out of the house. Foreclosure hasn't started yet. Who should we tell that we've moved out of the house? Mortagage company? We will be turning utlities off soon. When does our legal responsibility for the house end? I've asked these questions of our lawyer through e-mails which he is refusing to answer. I just want to know the best way to handle this so we don't have something come back & bite us in the butt. Thank You for your time!
Posted on: 21st Feb, 2011 09:37 pm
Home was in foreclosure, the bank stopped the foreclosure and wrote off our mortgage as a loss. They want us to pay monthly to a cashiering service . They say they don't want the home and we can stay, But we have no idea who we are paying, they have sent no paperwork at all. Bankruptcy in 2006, thought we reaffirmed mortgage. What should we do.
Posted on: 22nd Feb, 2011 11:12 am
if ive turned all my debts into a attorney to file bankruptcy, can i sell a truck thats been listed thats being repossesed. we do not have a claim number yet. thank
Posted on: 22nd Feb, 2011 11:48 am
My name is Ron and I am new here. I am getting ready to declare chapter 13. I am retired from the military and want to know, if any how can 13 may affect my pension? My lawyer says it cannot be touched in chapter 13.

Another question. Once your court approves a re-payment plan, how much money outside your budget can you save or have in the bank??
Posted on: 22nd Feb, 2011 02:27 pm
Hi smitty!

Welcome to forums!

Though you file bankruptcy, your pension will remain untouched. Your trustee won't be able to garnish your pension as it is exempt from garnishment.

Feel free to ask if you've further queries.

Posted on: 22nd Feb, 2011 10:38 pm
widow and judgement proof to a limit of $6,000 since 2008. in the process of filing bankruptcy. i want to maintain my house with equity of $94,000 and keep paying my mortgage. under which code or rule can i ask for exemption without losing equity and house at the same time?
Posted on: 26th Mar, 2011 09:46 am
Tommorro my first payment on my chapter 13 is due, I lost my job and don't think I can make it, I need my vihicle to find work, but I can ginve up my house what do I do.
Posted on: 27th Mar, 2011 05:58 am
my mortgage is in a chapter13 ..for seven month payments are not being applied to acct ..due to cant find acct with home Q at all checks have not been cash..homeQ saying dont have acct
Posted on: 27th Mar, 2011 09:52 am
Posted on: 27th Mar, 2011 06:03 pm
Hi linlin,

You will have to contact your bankruptcy attorney and trustee and check out what you need to do in this regard.


You cannot get the IRS debts discharged. You will be liable for paying off the IRS debts in full. You can set up a payment plan with them in order to pay off the dues.

Posted on: 28th Mar, 2011 12:37 am
signed reaffirmation ppwk on 3-1-11 and also the same date that chap 7 bankruptcy discharged -so reaffirmation on mortgage not good now, how does it work when no mortgage pymt made for 2 months and received ltr in mail stating foreclosure proceedings will start on home can I still walk away without consequences of any kind
Posted on: 11th Apr, 2011 05:08 pm
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