This introduction to bankruptcy will take you through what bankruptcy is, the different types of bankruptcy, whether it is the answer for you and how you can avoid this costly court procedure.
What is Bankruptcy? Bankruptcy is a federal court process. When an individual or business files for bankruptcy they are given a chance to 1) repay their debts under court protection (Chapter 13 bankruptcy) or 2) have their debts cancelled altogether (Chapter 7 bankruptcy). These terms refer to the chapter of the bankruptcy law that governs such court actions.
As soon as an individual or business files for bankruptcy their creditors are prevented from taking legal action against them unless the court grants its approval. There are two types of bankruptcies i.e. liquidation or reorganization. Liquidation is a Chapter 7 Bankruptcy and in this case your assets will be sold to repay your debts. Reorganization is a Chapter 11, 12 or 13 bankruptcy.
During a reorganization bankruptcy a plan is filed with the court detailing how you are going to pay your debts. Certain debts will need to be paid in full while others are paid based on percentages. Some debts may be written off in full. The plan usually lasts three to five years.
However certain debts cannot be cancelled through bankruptcy and these include:
* Any debt not listed your bankruptcy papers
* Child support and alimony
* Debts for personal injury or death caused by driving while intoxicated
* Most student loans
* Fines and penalties imposed for breaking the law (traffic tickets and criminal restitution)
* Most tax debts
The court will also place restrictions on your spending during the reorganization period (under Chapter 13). A set amount is deducted from your wages and a trustee of the court is appointed to pay your creditors. The good news is that if you honor your debt repayment plan your creditors may be amenable to granting you further credit in the future. However your bankruptcy will remain on your credit history for six years.
Liquidation bankruptcies are Chapter 7 bankruptcies. Here your assets will be turned over to the court and sold to repay your debts. Your creditors will not be able to take legal action against you but the bankruptcy will remain on your credit record for ten years. During this period you will probably not be granted credit in any form.
In 2005 a new bankruptcy law stated that your income must be below the median income for the same size family in your state or you will be required to go through a bankruptcy means test. If you have any disposable income you will be forced to file for Chapter 13 bankruptcy rather than Chapter 7.
Should you file for bankruptcy? There are serious consequences to this process and it does not solve long-term financial problems. However sometimes it’s the only reasonable option. If you are unable to pay your debts due to an illness or job loss you may be forced into it. However bankruptcy can be avoided by applying effective money management skills in the short and long term.
