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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 Guest!

Welcome to forums!

As the mortgage has been discharged in your bankruptcy filing, you can simply surrender the property to the lender who will start the foreclosure procedure. After the foreclosure, you won't be liable for paying off any deficient balance to the lender.

Feel free to ask if you've further queries.

Sussane
Posted on: 11th Apr, 2011 10:35 pm
Hello,

I filed ch 7 bankrupcy last year and I was discharged from all my debt including my home loan. I'm still in my home but I'm not making any payments. Bank of America keeps sending forms to fill out for the Home Affordable Modification Program. One of the questions on the form is, whether I have filed bankrupcy and if I have been discharged. Is it favorable for me to complete these forms and is it a good idea to disclose my bankrupcy information? Bank of America has not kicked me out yet and they keep sending my payments and keep calling me about trying to make a payment. I want to keep my home but I need to afford the payment. My current income is $5000/monthly. I know that my mortage cannot be more then 31% of my income. I bought my home for $485,000 in jan 2007, with no down payment.
If you can please advise me on what to do, that would help me and guide me so much. Thanks you help; I really appreciate it!
Posted on: 14th May, 2011 04:28 pm
Hi Sally,

As you had filed bankruptcy, it will be better if you could disclose the status of your bankruptcy in the application for Home Affordable Modification Program.

Take care
Posted on: 16th May, 2011 01:47 am
my house has been on the market for over a year with no bites. i haven't paid my mortgage for a year & my equity loan for 4 months due to loosing my job & being a 1099 employee unable to collect unemployment.
i am cosidering doing a deed in lieu of foreclosure. if i file bankruptcy first will i be forgiven the taxes by the irs for the banks loss?
thank you, lisa
Posted on: 20th May, 2011 04:37 am
welcome guest,

filing bankruptcy can help you in getting rid of your debts but your unpaid taxes won't be forgiven or discharged. you will be liable for paying off the unpaid taxes to the irs.
Posted on: 20th May, 2011 10:02 pm
chapter 7 was discharged in oct 2009. thought reaffirmation agreement had been filed. I was given copy of unfiled reaffirmation agreement. founf out today almost 2 years later agreement never filed. Lender said attorney did not file agreement. Attorney said lender did not file agreement. Whose suppose to file it in State of missouri. Can filinf motion to re-open discharged cahpter 7 to re-affirm mortgage open door for old creditors to come back after you? Under circumstances am I a renter or homeowner? Ive not missed any payments. am I accuring equity. Credit report shows zero balance on mortgage.
Posted on: 01st Jun, 2011 06:37 pm
Hi SS!

Welcome to forums!

As far as I know, your attorney should have filed the reaffirmation agreement with the court. It will be difficult for you to re-open your bankruptcy filing after 2 years of discharge. As the property deed still has your name on it, you are the homeowner but you're not personally liable for the mortgage payments. As a result, your credit report shows zero balance on mortgage.

Feel free to ask if you've further queries.

Sussane
Posted on: 02nd Jun, 2011 11:49 pm
Lost our home to foreclosre in 2008 which had a 1st and 2nd mortgage to purchase the home. We occassionally receive 2nd mortgage statements in the mail. I found out that the Statue of Limitations in Delaware for Promissory notes is 3 years from the start of the last payment/interaction which means that time has passed since my last interaction was in 2007 or early 2008. If the statute of limitations have passed, does this mean that Wells Fargo can try to sue me for the balance of that mortgage? This is what I am understanding. If this is the case, would it be best to file bankruptcy or wait for the mortgage to drop of my credit report which is due to do so in 2013? We really need a home and renting seems like such a waste of money.
Posted on: 07th Jun, 2011 11:32 am
Hi mld,

If the SOL has passed, then the lender won't be able to sue you for the debts. He may, however, keep on contacting you for the payments. I don't think you need to file bankruptcy in this case as your property has already been foreclosed and sold off. Filing bankruptcy will have further negative affects on your credit report.

Take care.
Posted on: 08th Jun, 2011 01:50 am
Im currently going thru a divorce, my wife just filed bankrupcy, I did not. I will be getting the house in the divorce settlement, is she eligible for half the equity in the house where she filed bankrupcy on it?
Posted on: 10th Jun, 2011 07:08 am
Hi M&M!

Welcome to forums!

If your wife has already filed bankruptcy, then she may not be able to claim any equity in that house. Nevertheless, you should speak to your divorce attorney in this regard and check out what can be done in this regard.

Feel free to ask if you've further queries.

Sussane
Posted on: 13th Jun, 2011 12:10 am
I filed chapter 7 about a year ago and my home was included in the bankruptcy. I continue to make my payments on my home, last month I
made a payment 25 days late. My lender sent me a letter stating if I did not make my payment due plus all penalties to be paid in 30 days they will start foreclosing on my home. When i called and asked about the penalties of $980.00, i was told these are fees charged to me for them checking on the property. In 1 month 13 checks and depending on weather they stop or not is the amount of each charge. Charges are 18.00$ to 65.00$ My home is on a dirt road in and area where I can see cars coming a mile away. They hae not checked on property. Are the fees legal or a scare tactic?
Posted on: 29th Jul, 2011 03:43 am
Well... it's difficult to say!! Why don't you contact an attorney and take his opinion in this matter?!
Posted on: 30th Jul, 2011 12:21 am
We are living in Florida State. We are filling for chapter 7 now. Do we have exemptions for our two vehicles other than wild card ($4000 each) and personal properties ($1000 each)?
Posted on: 30th Aug, 2011 09:49 am
Hi alr,

Motor vehicles, up to a certain value can be exempted if you file Chapter 7. You should contact a bankruptcy attorney and take his opinion in this matter.

Thanks
Posted on: 30th Aug, 2011 10:53 pm
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