Everyone has heard of bankruptcy before. But as common of a term as it is, it can be a very hard concept to actually understand.
You probably know that bankruptcy is only filed when a person isn’t doing well financially. Usually they are staggering beneath a mountain of debt that they can’t repay. They aren’t able to make money. Filing for bankruptcy is often a last ditch effort for people in overwhelming debt to get a fresh start.
While the main benefit of bankruptcy definitely is a ‘fresh start,’ there is more to the concept than that. In fact, bankruptcy is a very complex legal system that is essential to the modern-day economy. In addition to giving individuals a chance to remove the heavy burdens of debt, it also keeps credit flowing and the economy smoothly functioning. The modern way of life wouldn’t work without bankruptcy.
In the United States, bankruptcy is handled in special courts, the United States Bankruptcy Courts. Each federal district of the United States has their own. These bankruptcy courts are supervised by a special bankruptcy judge.
The point of explaining all of this is to highlight the fact that bankruptcy is indeed a legal proceeding. Once you file for it, you are not ‘home free.’ There is still a lot of work to be done to make sure that your debt is lifted off of your shoulders.
The most important thing to understand when considering filing for bankruptcy is that you have to be completely honest. Anything that you do that is fraudulent or dishonest will pretty much shoe your chances of a bankruptcy claim out of the door.
Only honest debtors that reveal all of the needed information (such as all of their property and debts including tax debts) are given a bankruptcy discharge. A discharge, also known as a bankruptcy injunction is the preferred outcome of any bankruptcy case. A discharge is what disallows your creditors from contacting you any longer. It is what takes the weight of bankruptcy off of your shoulder.
Though there are many different types of bankruptcy in the United States, there are two that are more common than all of the others. These two, Chapter 7 bankruptcy and Chapter 13, are discussed in greater detail below.
Chapter 7 Bankruptcy
The most widespread chapter of bankruptcy, Chapter 7 bankruptcy governs the liquidation process under United States Bankruptcy law.
In Chapter 7 bankruptcy the court can choose to cancel the bulk of your debts. In some cases, they can even choose to cancel all of your debts. The backside of this is that they are also allowed to sell (liquidate) some of your assets. The liquidation of these assets serves to take place of the payments and is placed towards the creditors.
One of the reasons that Chapter 7 bankruptcy is the most common is that it is a fairly quick process. It takes anywhere from three to six months to complete. In addition, it can cost as little as $306 (the cost of filing) plus administrative fees and extra costs (such as appraisal fees, pre-court counseling, and title search charges).
Chapter 13 Bankruptcy
Slightly less popular than Chapter 7 bankruptcy is Chapter 13 bankruptcy. They are run in two very different ways.
Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy is all about financial rehabilitation. In Chapter 13 bankruptcy the debtor takes part in a federally directed financial rehabilitation program. A court-approved repayment plan is usually agreed upon as a way for a portion of the debt to ultimately be repaid.
Repayment plans in Chapter 13 bankruptcy are most common when the debtor in question has some sort of income and has the means to repay some or all of their debts over a period of time. In fact, doing this is one of the most typical types of debt consolidation.
Though Chapter 13 bankruptcy might take longer to file and though it might not wave away your debts forever, many people choose it over Chapter 7 bankruptcy because liquidation is not part of the process. In Chapter 13 bankruptcy you can save your house from foreclosure, cure overdue mortgage payments, save a cosigner on your overdue accounts, and pay a court-determined monthly payment until your debts are paid off.
Can I File for Bankruptcy?
If you’re deep in debt or otherwise seriously struggling financially, you might be considering filing for bankruptcy.
While, in truth, no one really wants to file for bankruptcy, it can be the only choice for many people.
You can file for bankruptcy if you:
- Don’t have enough money to pay off your loans. An example of this is your monthly loan payments exceeding your monthly income.
- Haven’t previously received a bankruptcy discharge.
- Haven’t previously filed for bankruptcy and had it dismissed within the previous 180 days.
- Have been honest and haven’t defrauded your creditors.
Even if you are eligible to file for bankruptcy, that doesn’t mean that you should. Since filing for bankruptcy is such a serious thing, it is generally best to try other alternatives first.
Below are a few of the instances when filing for bankruptcy makes sense:
- You have already tried to negotiate with your creditors to no avail. Using a debt management plan or another repayment plan is definitely preferable to filing for bankruptcy.
- You aren’t making enough money to pay off your debts. If you have to pay $5,000 a month in debts but only make $3,000 a month, you’re obviously in a tricky situation. Bankruptcy might be your only way out.
- You want to keep your IRA. Due to a Supreme Court ruling, you are allowed to keep your entire retirement account when filing for bankruptcy. In many cases, it is better to file for bankruptcy instead of using all of your retirement money to get yourself out of debt.
Filing for bankruptcy should only be used as a last ditch effort to save yourself and your finances. When nothing else has worked and you just can’t get yourself out of debt, then bankruptcy might just be the only thing left. It could just help you get your life and finances back on track.