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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 Pat,

Welcome to this forum.

It's hard to imagine what you have gone through. It's really traumatic. I can only pray for your good health.

You said you have tried to avoid bankruptcy but then have you tried out any other option to repay your debts?

There are some alternatives which may help you get out of this situation.

Refer to the section on
Alternative ways to avoid bankruptcy
to know more about the options.

Feel free to ask us if you have any query on the alternatives.

God bless you.

Posted on: 03rd Jan, 2007 11:15 pm
While filing bankruptcy what are eight priority taxes?
Posted on: 26th Mar, 2007 12:46 pm
All debts of a debtor are assigned priorities for payment in bankruptcy. Most of prepetition tax debts are regarded as eight priority taxes.

Normally these are certain income & other taxes that debtor owes before he files a bankruptcy petition.
Posted on: 26th Mar, 2007 12:57 pm
Hi McCutchin,

Welcome to the forum.

The prepetition eighth priority taxes are unsecured federal taxes given below:
  • Income taxes for the tax years ending on or prior to the date of filing bankruptcy, for which a return is due within 3 years of filing the bankruptcy petition.

  • Income tax assessed within 240 days before the filing.

  • Withholding taxes which you are liable to pay.

  • Income tax which was not assessed prior to the petition date but were to be assessed on the petition date. These taxes were still assessable as on the petition date because there was no return, late return (within 2 years of filing) or fraudulent return filed.

  • Excise tax on transactions which occur prior to the date of filing the petition, for which a return is due within 3 years of filing the petition. If the return is not required, these excise taxes include only those taxes on the transactions started during 3 years immediately prior to the filing date.

  • Employer's share of employment tax on wages or commissions (including vacation, sick leave etc) paid as priority claim or for which a return is due within 3 years of the filing date, including a return for which extension of a filing date is obtained.
Hope this is going to help you...

God bless you.

Posted on: 27th Mar, 2007 02:49 am
About 4 yrs ago I had a ch 13 case dismissed for non payment. My home was in foreclosure and included in the case. Aprroximately 7 mths after the dismissal I was able to satisfy my mortgage obligation. Is there anyway I can have my dismssal changed to something else so that I start obtaining credit again?
Posted on: 13th Jul, 2008 08:41 pm
Hi Rosie,

Welcome to forums.

It's good to know that you paid off the obligation even after a bankruptcy dismissal. But the fact remains that even though your bk Chapter 13 may have been dismissed, it's going to stay on your credit report for 10 years. Had the bk been discharged, it would have stayed for almost 7 years. However, the negative effect on bk dismissal gets minimized with time; so you can very well opt for a loan with favorable terms after a year or two from now onwards. But in the meanwhile you should make on-time payments on other debts, so that they can offset negative impact due to the dismissal, at least to some extent.

Posted on: 13th Jul, 2008 10:39 pm
with the loss of my husbands job 5 months ago we are now in a situation where unemployment will be running out in 2 months and then our only income will be mine which is 680.00 per month we have 3 children. our house payment is almost 1900.00 alone we have never been late on anything our other bills total monthly payments of about 900.00 per month in credit not counting the cost of just living like food gas and electric total of debt we need to file on counting the house is about 296000 with only a 680.00 income will we qualify for chapter 7 ? and if we own our vehicals will we have to sell them to pay back some of the dept????
Posted on: 16th Aug, 2008 05:31 pm
Hi Tozzi,

Welcome to forums.

I can understand your situation and I must say it's tough. But at times such things do happen and then all we can do is fight out the situation. Is your husband looking for a part time job or something till he gets a permanent one? With your income, it's impossible to make payments. Moreover, it's going to be tough for you to handle your living expenses. So, why don't you apply for Section8 Voucher housing program? I think it will be a suitable option far you as far as paying your mortgage is concerned.

I feel filing chapter 7 isn't the right solution here because depending upon the state, you may lose your home, vehicle and the like. So, frankly speaking I believe you should enquire about section8 housing vouchers at the office of your State Housing authority.

Know more on Section8 housing vouchers from a previous discussion on this topic.

Posted on: 19th Aug, 2008 12:07 am
Over the past year I went thru a gut-wrenching divorce & was left with a bit of debt from my ex wife's rehab and a house with a mortgage I couldn't really afford but desperately wanted to hold onto. I started investing in the stock market as a way to supplement my income using low or no interest credit card loans and trading on margin for short term gains. I was also using these personal credit card loans to help keep my business afloat. At first it was working and supplementing me just enough but as the market began to slip I began to try and hold out. As margin calls came in I kept borrowing more money and eventually dipped into a home equity line of credit. Eventually I used up every ounce of credit and the stock market as we all know tanked completely and basically wiped me out. Here's what I'm looking at: I owe $184,000 in unsecured credit card debt, I owe $124,000 on a home equity line of credit (technically a 3rd mortgage) that I just found out is still attached to my ex wife's name despite her no longer being on the deed of the house. I am self employed and have an S Corp which makes about $75,000 per year. After all of my business expenses my personal income taxes probably reflect no more than a $40K income. I've watched my industry take a downturn and expect it will trickle down to my business in about 4 months which will decrease my income severely. I cannot fathom how to even make a dent in the $308,000 I owe and yet everywhere I turn people say "declare bankruptcy as an absolute last resort, your life will never be the same." Obviously this debt makes me sick to my stomach on a daily basis but I just wanted to know if there's any other remotely possible solutions or do I fall into a worst case scenario here and should go for bankruptcy? I would like to try and hold onto my house through the process if my mortgage company winds up qualifying me for lower payments through their home retention program - otherwise I'm headed down the road of foreclosure. The house is worth less than what I owe on it even without the $124k third mortgage. My other question is how to protect my ex-wife's credit through this process when it comes to that $124K equity loan. Ultimately it was my choices that led to this financial disaster and she's got enough on her plate at the moment. Is my only option through bankruptcy to hold onto that loan whose payment is $1025 a month or is there another option wherein her credit doesn't get trashed? Also, how will my bankruptcy affect my S Corp (which has no assets) if at all? I heard from an accountant friend that in the state of California you're allowed to keep up to $22,000 in assets through bankruptcy. Is that true? I have about $10,000 left in the stock market of my own original money that I'm going to need this Spring when my business could take a big downturn.
Posted on: 14th Dec, 2008 07:22 pm
Welcome D,

Your query has been answered by one of our forum members in the given link:

Check it out and I hope it will help you.
Posted on: 14th Dec, 2008 11:29 pm
can you get alimony reduced because it is way too high
Posted on: 08th Jan, 2009 07:09 pm
can you get it reduced when your pay has lesssened to disability
Posted on: 08th Jan, 2009 07:10 pm
what do you do if you can not catch up
Posted on: 08th Jan, 2009 07:14 pm
I don't think it gets lessened. Better consult your attorney in this regard.
Posted on: 08th Jan, 2009 11:33 pm
I'll be inheriting assets worth $35,000 in a week or 2. Yes, I am very happy for that. But the problem is elsewhere I had just filed for bankruptcy (Ch 7) because I was unable to pay debts of $40,000. I was thinking if I could dismiss my bankruptcy as now Im capable of paying back the debts. I had heard that court dismisses the bankruptcy if debtors are not present during the hearing. Do you think I can dismiss my bankruptcy in this way? I haven't contacted my lawyer yet just want to get some great advise from you all¦
Posted on: 15th Jan, 2009 02:27 am
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