All About Bankrupt

After you’ve exhausted all of your other options sometimes going bankrupt is the only option left. This article explains what you need to know about going bankrupt.

When should you file for bankruptcy?

Going bankrupt should always be a last resort only after you’ve exhausted your other options. It makes it extremely difficult to get credit or buy a home. You may be able to get it off your credit report but it’s not a guarantee.

If you’re are being sued

Being sued is not a good thing. Even if you are ‘judgment proof’ now once they sue you and win that judgment says on your credit for 7-10 years and depending on your state they can go after you forever for the money. That means you ever do come into some money even decades later they can swoop in and take it.

If your wages are being garnished

Once they start taking money from your check its hard to get them to stop. Going bankrupt may be the best, but not only, option to stop them.

If you’ve tried all other methods and failed

If you’ve tried credit repair and credit counseling then you might have to file bankruptcy.

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Types of bankruptcy

Most individuals will go with either chapter 7 or chapter 13 bankruptcy. Chapter 7 wipes out all the debt within 3-6 months while chapter 13 makes you go through a re-payment plan for 3-5 years after which the remaining debt is discharged.

Chapter 7

A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 13.

Instead, the bankruptcy trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. Part of the debtor’s property may be subject to liens and mortgages that pledge the property to other creditors.

In addition, the Bankruptcy Code will allow the debtor to keep certain “exempt” property; but a trustee will liquidate the debtor’s remaining assets. Accordingly, potential debtors should realize that the filing of a petition under chapter 7 may result in the loss of property.

Chapter 7 Eligibility

To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41), 109(b).

Subject to the means test described above for individual debtors, relief is available under chapter 7 irrespective of the amount of the debtor’s debts or whether the debtor is solvent or insolvent.

An individual cannot file under chapter 7 or any other chapter, however, if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e).

In addition, no individual may be a debtor under chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111.

There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.

One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The debtor has no liability for discharged debts. In a chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations.

Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.

Thanks to the new bankruptcy law a chapter 7 discharge is a lot harder to get–but not impossible–than it used to be.  You may file for chapter 7 if:

  • You are a disabled vet whose debts were mostly incurred during active duty
  • Most of your debts were incurred due to the operation of a business
  • Your family income is below the median income of your state  . If your income is above the median then you have to pass an additional means test.
  • You haven’t obtained a discharge through chapter 7 within the last eight years.

Bankruptcy Means Test

Thanks to the so-called  Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) it is more difficult to file for bankruptcy than it was in the past.

The new law included an presumption of abuse. It’s up to the debtor to prove that he/she is not just trying to take advantage of the system.

Step 1

If the debtor’s income is below the state median that the debtor is in the clear and may file for chapter 7 bankruptcy. If it is not below the median there is still hope in step 2.

Step 2

The debtor must determine whether he/she haas enough income left over (called “disposable income”), after paying for allowed monthly expenses. These include your basic living expenses such as your rent, water, food, electricity etc.

If the debtor does have enough income  to pay the unsecured debts–like credit cards–the debtor fails and may not file for chapter 7 bankruptcy.

You can use the means test calculator here to see if you qualify for chapter 7.

Chapter 13

Going bankrupt under chapter 13 basically is like a debt consolidation. You make payments to a government trustee for the next 3-5 years after which your remaining debt is discharged. Most people who aren’t eligible for chapter 7 elect for a chapter 13 discharge.

A chapter 13 bankruptcy is also called a wage earner’s plan. Enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.

If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.”

If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years.

During this time the law forbids creditors from starting or continuing collection efforts.

There are advantages of Chapter 13

The principle one being that you can save your home from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time.

Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan.

Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.”
This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.

It also protects any of your co-signers from liability

There are still, however, eligibility requirements

Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual’s unsecured debts are less than $394,725 and secured debts are less than $1,184,200. 11 U.S.C. § 109(e).

These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor. Id.

An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.

In addition, no individual may be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing.

There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.

Your debts must not be too high $1,184,200 for secured debt and $394,725 for unsecured debts

If you think bankruptcy is the best option you can contact a local attorney or you can do it yourself. Get help with bankruptcy with Curadebt or call them at 866-442-2390

If you want to do it yourself here is an instruction guide from renowned site nolo.com.

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