Bankruptcy: What You Need to Know Before You File
If you are thinking of filing for bankruptcy, there are facts you need to know before you make a decision.
First, understand that filing for bankruptcy should be a last resort if you have borrowed money and have absolutely no way or repaying it. Filing for bankruptcy will have a very negative effect on your credit history for 10 years or longer, and may also impact your quality of life.
If you do declare bankruptcy, you will need to file with the bankruptcy court a complete list of all your outstanding debts and of all your assets. Your assets will fall into one of two categories: Exempt and non-exempt.
Exempt assets are those that you do not have to use to repay your debts. Generally speaking, this includes the equity in your home, a certain amount of equity in your automobile(s), a small amount for clothing, and a small amount for personal items.
The court will then appoint a bankruptcy trustee to oversee the payment of your debts. These debts will also fall into one of two categories: Secured and non-secured.
Secured debts are those in which the creditor has a security interest in the property – usually property that was purchased with the credit. Examples of this might include items such as a fishing boat or a second home.
Non-secured debts include credit cards and any loans not secured by real property.
Secured debts take precedence over non-secured, meaning that the secured debts must be paid off first. If you cannot pay off a secured debt, your creditor can take back the property in which it has a secured interest.
Once you have filed all necessary paperwork with the bankruptcy court and have been appointed a trustee, the court will issue an automatic “stay.” This prevents your creditors from taking any further action against you outside the bankruptcy case. This protects your from repossessions and foreclosures.
Chapter 7 vs. Chapter 13 BankruptcyThere are significant differences between a Chapter 7 and a Chapter 13 bankruptcy.
A Chapter 7 proceeding is a liquidation proceeding where you are allowed to keep only your exempt property. All of your non-exempt property is then sold to pay your debts. If you have “dischargeable” debts, such as money owed on credit cards, these debts will be discharged.
However, some debts, such as child support, student loans and taxes are usually not dischargeable in a Chapter 7 bankruptcy.
In comparison, a Chapter 13 bankruptcy is a reorganization bankruptcy. Choose this type of proceeding if your goal is to pay off your debts over a period of three to five years. This type of bankruptcy is usually chosen by people who want to keep their non-exempt property or who want to catch up on past bills to avoid a repossession or foreclosure.
However, a Chapter 13 bankruptcy is really an option only for people who have enough of a predictable income to pay off their debts in a reasonable amount of time, and to have money left over for living expenses.
Once both you and your creditors agree on a repayment plan under Chapter 13, and the bankruptcy court approves it, both you and your creditors are bound by it.
Congress recently passed new laws making it more difficult for individuals to declare bankruptcy. This means you need to be sure to discuss bankruptcy with a reputable and knowledgeable attorney before filing.
Declaring bankruptcy is not an easy thing. But given the right circumstances, it can offer both debt and stress relief.
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