When all else fails, when you can’t work anything out with your creditors, when
you can’t pay off your debt – or at least can’t pay it off the way it is structured,
you may decide to consider bankruptcy.
It’s a big step that will affect your credit rating and ability to obtain reasonably
priced loans for years to come. And it may bring a
feeling of failure that can be hard to handle . But sometimes, you’ve
got to do what you’ve got to do.
Bankruptcy is intended to give a responsible debtor who lands in trouble a fresh
start and open a way forward.
There are different kinds of bankruptcy and they accomplish different things, sometimes
dissolving debt and sometimes rearranging it to make it more manageable.
Although you can go it alone in federal bankruptcy court, you should consider seeking
the assistance of an attorney. You may also want to see an accountant or financial
advisor. After all, this is an important legal proceeding.
For help in understanding the language of bankruptcy, try this
glossary.
There are several types of bankruptcy and they are identified by the chapter of
federal bankruptcy law that defines and governs them.
You cannot file for any type of bankruptcy if, within the last 180 days, a bankruptcy
petition you filed was dismissed due to your willful failure to appear in court
or comply with any orders of the court, or you voluntarily dismissed the previous
petition after creditors sought relief from the court to recover property on which
they hold liens.
You also cannot file for bankruptcy unless you have received credit counseling from
an approved credit counseling agency within the last 180 days. If a debt management
plan is developed during the required counseling, it must be filed with the court.
A list of government-approved credit counselors is available
online.
There may be exceptions to the credit counseling requirement in emergency situations
or in areas where a U.S. trustee or bankruptcy administrator has determined there
is a shortage of credit counselors.
Individual Bankruptcy
The two most common forms of bankruptcy for individuals are Chapter 7 and Chapter
13.
Chapter 7 provides for liquidation of one’s
assets.
If you file Chapter 7, you will have to pass a means test if your income is above
a certain level. Once the filing is accepted, a U.S. trustee is appointed
to oversee your case, reduce your non-exempt assets to cash and distribute the money
to your creditors. Some of your property will be exempt from the process and your
secured creditors – those who lent you money for which you put up collateral --
also have rights.
If you have no non-exempt assets, the case is referred to as a no-asset case. There
will be nothing to sell and your unsecured creditors will receive nothing. But if
assets are sold and a creditor files a proof of claim with the court, he is eligible
for a payout.
Normally, individuals receive discharges releasing them from personal liability
for certain dischargeable debts just a few months after the petition is filed.
Chapter 13 provides for a restructuring of
debt to make it more affordable. It may be available to those with a regular source
of income and requires payment of the debt, usually within three to five years
.
Chapter 13 allows you to keep a valuable asset, such as your home, and allows you
to propose your own plan for paying off creditors. That plan will be approved or
disapproved by the
judge depending on whether it meets the bankruptcy code requirements. Payments,
based on your anticipated income over the life of the plan, are made to your creditors
through the trustee assigned to manage the case.
You must complete the plan and make all agreed payments before your debts will be
discharged. Yet you will be protected from lawsuits, garnishments and the like during
the term of the plan. More debts are discharged through Chapter 13 bankruptcy
than through Chapter 7.
However, Chapter 13 does less damage than Chapter 7 because it involves payment
of the debt.
No employer can discriminate against you solely because you filed for bankruptcy.
Two More Options
Chapter 12 bankruptcy provides debt relief
to family farmers and fishermen with regular income. It is similar to Chapter 13
bankruptcy, in that you propose a plan to pay your debt over a three to five year
period under the management of a trustee. You are allowed to continue to operate
the business during the period of the plan.
How It Works
There is a bankruptcy court in each federal court jurisdiction presided over by
a federal bankruptcy judge. That judge may decide any matter connected to the case,
including whether you are eligible to file and whether your debts should be discharged.
Little of the process of bankruptcy is conducted in the courtroom and your involvement
with the judge will be very limited. Typically, if you file Chapter 7 bankruptcy
you will not
appear in court or see the judge unless an objection is raised in the case. If you
file Chapter 13, you will have to appear before the judge for a plan confirmation
hearing.
You should expect to attend a meeting of your creditors, however, during which the
creditors may question you about your debts and your property. The meeting is usually
held in the office of the U.S. trustee assigned to the case.
Discharge of Debt
A discharge releases you from personal liability for specified kinds of debt. You
are no longer legally required to pay a discharged debt. However, if a creditor
has a charge on a specific property securing the debt and that charge has not been
made unenforceable in the bankruptcy case, the creditor may recover the property.
A discharge order is permanent and prevents the creditor from taking any form of
collection action on the discharged debt, including telephone calls, letters and
personal contact.
Any debts not discharged must be paid after the bankruptcy. The law requires that
certain debts not be discharged, but the list varies under each chapter of the bankruptcy
code.
Consider the Alternatives
Before you take the step of filing for bankruptcy, you might want to consider whether
there is another way to straighten out your finances. Take a look at the options
you already have, such as cutting back spending, selling something and using the
proceeds to pay debt, says said Gail Cunningham, vice president for public relations
at the Maryland-based National Foundation for Credit Counseling.
If you still need outside help, you can try to reach out-of-court settlements with
your creditors. They may be able to reduce your interest rate or extend the term
of the loan so you make payments over a longer period of time, but each payment
is smaller. Or, they may settle for a partial payment and write off the rest of
the debt. Debt counselors may also be able to help.
Sources: The web sites of the federal court system, uscourts.gov and
the United States Department of Justice, usdoj.gov
A glossary of bankruptcy terms