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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,

I don't think it's a great idea to not attend the court hearing and dismiss the bankruptcy. There are chances that the court may consider this as a fraud and may even penalize you. In my opinion you should contact your lawyer and take his suggestions. I don't think even he will agree to this.

Thanks,

Jerry
Posted on: 15th Jan, 2009 02:34 am
Me and my husband…both of us are looking at filing bankruptcy. I know there are different ways to avoid this bankruptcy but I don't think we will be able to because my husband has been without work for about a year and there is no chance that he will be getting a job in the near future... He is trying desperately to look for employment and now he is thinking of moving outside state to get a job. My question will be Should we try to sell our house before declaring bankrupcy or should we sell the property after we have declared it??
Posted on: 22nd Jan, 2009 03:56 am
Hi Daisy,

You should file bankruptcy first and then sell off the property during the bankruptcy. This selling of the property should be done in the presence of your bankruptcy trustee. Your bankruptcy attorney will also be able to guide you in a better way. As far as I know, your case will be filed in the state where you are living right now. Moreover, you should also note that in any case, you should not transfer the property right now to anyone else because such a transfer may be considered as a fraudulent one by the trustee.

Thanks
Posted on: 22nd Jan, 2009 04:11 am
I am about to file chapter 13…due to some hardships. Just wanted to ask you all if I can get credit cards once I file bankruptcy. I came to hear that I will not be able to get credit cards if I file bankruptcy! (Oh! Lord). Can anyone out here tell me if I'll be able to get credit cards after filing bankruptcy or not???
Posted on: 26th Jan, 2009 02:39 am
Hi Tulip,

As far as I know, you will be able to get a credit card though you file a Chapter 13 bankruptcy. Getting a credit card will also help you in improving your credit score in the long run. But it is always better to get a secured credit card after bankruptcy rather than getting an unsecured one. A secured credit card is the one which is obtained by opening up a savings account with a bank offering such a program. The bank will offer a credit card and secure it with a deposit.

Thanks,

Jerry
Posted on: 26th Jan, 2009 02:48 am
Hello, I've recently filed for Chp 7. I have my 341 appearance next Tues. I've included my condo in my bankruptcy because that is what created my financial downturn. How long can I stay in my condo after my bankruptcy is completed?
Posted on: 27th Jan, 2009 12:42 pm
Hi Guest,

Once the bankruptcy trustee decides to liquidate the property and sells it off to a new owner, you will have to leave the property.
Posted on: 27th Jan, 2009 11:14 pm
Does a cash advance of $30K classify as a"large purchase" which is not dischargeable in a BK 7? I advanced the money to help pay my bills and mortgage while I was unemployed.
Posted on: 16th Feb, 2009 09:45 pm
I think it will be discharged when you file Chapter 7 bankruptcy.
Posted on: 18th Feb, 2009 02:07 am
I signed mortgage on a mobile home 9 yrs. ago so my sister and her kids would have a place to live. My sister promised to try and get the morgtage in her name after making payments for a few yrs. She won't try and get it into her name. She has made all the payments. Anything I can do?
Posted on: 20th Feb, 2009 07:44 pm
I have borrowed from friends and relatives and have given them promisory notes stating I will repay them when I sell my home. If I declare chapter 7 bankrupcy will they come before credit card companies when and if I sell my house ? THANK YOU.
Posted on: 21st Feb, 2009 08:40 am
In my opinion, these debts will be wiped off when your bankruptcy will be discharged. Consult your bankruptcy attorney once. He is the best person to answer this query.
Posted on: 23rd Feb, 2009 02:07 am
how do they evaluate the value of your house for bankruptcy chapter 13 or 7
Posted on: 23rd Feb, 2009 05:44 pm
I think the bankruptcy trustee will go go for an appraisal of the property to determine the value of the property for bankruptcy.
Posted on: 23rd Feb, 2009 09:18 pm
I have just received a letter giving the mortgage company relief from automatic stay. What happens next
Posted on: 02nd Mar, 2009 12:04 pm
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