Nobody wants to file for bankruptcy but if you are considering it there are a few things you need to know before you take the plunge. If you see yourself as having no other alternative this guide will attempt to answer a few of the most commonly asked questions about the decision to file for bankruptcy.

Please note that since bankruptcy laws vary from state to state all applicable aspects could not be covered here. See an attorney for information specific to where you live.

What is Bankruptcy?

This is a legal method used to discharge debts that cannot be met. In a sense it is a way of wiping the slate clean but there are pros and cons to a choice like this so consider them well before deciding.

Many influential companies have used bankruptcy laws to sort out their debt problems and the process is the same for the individual. The debt you have incurred may be of any amount. In fact the only requirement that needs to be met to file for bankruptcy is that you have debts.

Types of Bankruptcy

There are two types of bankruptcy that apply to individuals (with the exception of farmers) and they are:

Chapter 7 (liquidation) and

Chapter 13 (adjustment of debt of an individual with regular income)

Chapter 7 Bankruptcy

Chapter 7 deals with a debtor who has few assets but many debts for example credit cards, retail purchases, medical bills and other ‘dischargeable debts’.

Dischargeable debts are debts that you won’t have to pay in the event that a court of law grants a ‘discharge’. In this event creditors are paid (if they are paid) with anything that the debtor owns which is not claimable as an exempt item. There are debts that are not classed as dischargeable under Chapter 7 that are dischargeable under Chapter 13 bankruptcy.

If your debts are dischargeable then a Chapter 7 is recommended. However if your debts include rent and mortgage arrears, tax debts or student loans a Cahpter 13 filing is advised.

Chapter 13 Bankruptcy

Chapter 13 debtors usually file for bankruptcy because they are unable to pay their rental, mortgage, car or other secured type debts. They often have substantial debts that are not able to be discharged under Chapter 7 bankruptcy. In most cases the debtor wants to retain his or her assets and they cannot be claimed as exempt.

Chapter 13 bankruptcies may also be filed to provide protection for a spouse or parent in the event they are liable for your debts via marriage or co-signing for a loan. In this case creditors are paid by means of the debtors future earnings and a repayment plan is proposed.

To file for a Chapter 13 bankruptcy the debtor must have some type of regular income. This may be wages, commissions, rents, public benefits, social security, unemployment compensation, alimony, child support or pensions.

Chapter 13 payments are structured so that taxes are paid first, then the landlord, mortgage and other secured creditors are paid in full over the 36 to 60 month period of a chapter 13 plan. In so doing the debtor will retain his house, apartment, car or asset securing the debt. Any unsecured creditors will get any money that remains after these payments are made. They do not have to be paid in full.

Note that if the non-contingent unsecured debts or secured debts are greater than a certain amount or if the debtor is a stockbroker or commodities dealer he or she is not eligible for a Chapter 13 filing.

Drafting and Filing the Bankruptcy Petition

This is a way of providing in-depth information to the Bankruptcy Court about a debtor’s current assets, liabilities, income, expenses and financial transactions. The debtor is advised to complete the required forms as accurately as he or she can so there can be no delay. All information provided should be truthful or the debtor risks a fine and/or imprisonment.

Bankruptcy forms are sold at most legal stationery outlets and costs in the region of $20. It contains several individual carbonized forms and a worksheet. The debtor drafts his information onto the worksheet and then transfers it onto a petition.

How Much Does it Cost?

A Chapter 7 petition for an individual or married couple costs in the region of $200 and a Chapter 13 will cost about $185. These fees can be paid in installments within 120 days of the date of filing. In the event that you pay a fee to an attorney or petition official you can’t pay the filing fee in installments. The discharge of debt will not be allowed until the fee is paid.

You are required to file the original copy of the petition and three other copies with the court. Another copy must be retained by the petitioner. It may be typed or handwritten as long as it is legible. Copies may be photocopied and filed but one signed original must be provided.

Debts

You must list all of your debts or risk being obligated to pay it (unless the relevant creditor actually knew there was a bankruptcy proceeding and filed a claim in time). If you question whether a debt is valid you should still list it since it will more than likely be discharged. Indicate on the bankruptcy petition that the claim is disputed, or that the dollar amount of the debt is uncertain or contingent.

Three types of bankruptcy debts are listed on the schedules: priority, secured and unsecured.

What Happens Once You have Applied for Bankruptcy?

If there was a garnishment against your salary for a debt, that garnishment must stop.

If a foreclosure or foreclosure sale was pending against your home, it must stop.

If your landlord is trying to evict you, such action must stop until the court orders otherwise.

If your car or other property was to be repossessed for missed payments, the automatic stay prevents the repossession.

If there are lawsuits against you prior to your filing those lawsuits are automatically stayed.

As you can see filing for bankruptcy is a fairly complex procedure but it will get you out of some pretty sticky financial situations.

If you do file for bankruptcy be aware that is will be well documented and filed and will not look all that attractive for your future credit options.

Think long and hard before you file for bankruptcy as it may haunt your future prospects.