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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 noone,

I guess, you have filed bankruptcy. Once you file bankruptcy, the automatic stay will halt all the actions of the creditors to collect the debts from you until your bankruptcy case is complete.

Thanks
Posted on: 02nd Mar, 2009 09:41 pm
I filed chapter 7 in Oct. 2005. It was discharged on Jan. 2006. With the way things are going with the economy I am going to have to file a chapter 13. I only have my disability check(791.00) and 326.00 coming in from my place of employment (as they still pay me since I was employed when had my accident) If I file chapter 13 will they take money from my disability check or will they just take it from the 326.00? I owe 19000.00 on credit cards but I know I can't file chapter 7 for 8 years. Also am I eligable to file chapter 13 if I filed in Oct. 2005 and it was discharged Jan. 2006 or do they go by the discharge date instead of when I filed?
Posted on: 05th Mar, 2009 07:45 pm
you will be able to file chapter 13 bankruptcy after 4 years from the discharge date of chapter 7 bankruptcy. as far as disability benefits are concerned, they cannot be garnished in any case.
Posted on: 05th Mar, 2009 10:27 pm
I have a friend that can't afford a lawyer to file for bankruptcy. Please help me with the options for her. Thank you.
Posted on: 12th Mar, 2009 12:18 pm
Hi iambatmaniam,

One must have an attorney in order to file a bankruptcy case. Individuals can file a bankruptcy case without an attorney or what is known as "pro se," but as far as I know, it is extremely difficult to do it successfully.

Thanks
Posted on: 12th Mar, 2009 10:43 pm
i am filing chapter 7 and i have a home equity loan is it possible to add that to my debut in massachusetts
Posted on: 23rd Mar, 2009 08:43 pm
Hi Guest!

Welcome to forums!

I did not understand what you wanted to say by:"is it possible to add that to my debut in Massachusetts"

Can you please explain this? It will help me to answer your query.

Sussane
Posted on: 23rd Mar, 2009 10:09 pm
Hi

Do you want to know whether you can add your home equity loan to the list of your debts under chapter 7 bankruptcy? If yes, then i believe that is quite possible.
Posted on: 26th Mar, 2009 06:54 am
hi there…i have student loans listed on my credit files. however, the important part is that they were both included in my bankruptcy which was filed in march 2006 and got disvharged in march 2008. can you guys tell me that even though the student loans were never paid off, but i guess they were written off as i filed bankruptcy, isn't they? one more question… if my bankruptcy was discharged in march 2008, when will the bankruptcy on my credit report drop off ? 6 years from the date of the filing bankruptcy or 6 years from the date of discharge of bankruptcy?
Posted on: 30th Mar, 2009 03:36 am
Hi Guest,

Student loans do not get discharged when you file bankruptcy. You will have to pay off the students loans in order to remove it from your credit report. If you pay off the student loans, it would have a positive effect on your credit report as well.

As far as I know, if you file bankruptcy and get it discharged, it remains on your credit report for 10 years. Credit bureaus will not remove it from your credit report prior to that.

Take Care.
Posted on: 30th Mar, 2009 03:58 am
Hi there…I am planning to file bankruptcy :( . Just wondering whether I can keep any properties after filing bankruptcy. Can anyone help me???
Posted on: 09th Apr, 2009 02:32 am
Hi Guest,

You haven't mentioned the type of bankruptcy you are planning to file. If you file chapter 7 bankruptcy, then you can keep the property which is exempt from the claims of creditors. The value of the property is the most important thing to decide whether the property is exempt or not. The value of property is basically the worth of the property now and not the amount you paid for it. Your bankruptcy trustee will be interested in the resale value of your property.

You can consider filing chapter 13 bankruptcy if you are behind in payments and can afford to pay the mortgage as well as the past due amount over a period of 3-5 years.

Take Care.
Posted on: 09th Apr, 2009 02:52 am
Hiya…I have a question for you all. Hope if anyone can answer it for me…I sent in our last payment. :) After that I contacted the trustee's office and informed him. He asked me if I sent in our 2008 tax returns. Well I haven't. Do I really need to pay the taxes?
Posted on: 10th Apr, 2009 02:37 am
Hi Guest,

Congratulations :) It's great to hear that you made your last payment. As your bankruptcy is still not discharged, you'll have to pay the taxes for 2008. However, you may take the advantage of the tax refunds. I would suggest you to consult your bankruptcy attorney. He will be the right person to help you in this issue.

Thanks.
Posted on: 10th Apr, 2009 03:16 am
Hello everyone,

Hope you people can throw some light Me and my ex-wife are divorced. But the saddest part is that I continue to pay for her car as its in my name too and I even support my son. As I was unable to pay the mortgage, my house got foreclosed on January 15th. Now as Im in a terrible situation¦I have not paid my credit card bills for about four months. Around $50,000 in credit card debt :( . I make good money. I have been ignoring their calls. I need to think about my future and save money in case I lose my job. What can credit card companies do to me? How can I qualify for bankruptcy? The whole situation is stressful :(
Posted on: 15th Apr, 2009 03:14 am
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