The Basics of Personal Bankruptcy Law

Bankruptcy is a legal process that enables eligible persons to repair their financial status through the court system. The foremost purpose of a bankruptcy is usually to clear or restructure debts that a person no longer has the ability to pay. Although bankruptcy has its drawbacks and challenges, it can at times prove very helpful for individuals truly unable to pay their debts. After filing bankruptcy, many filers have improved ability to manage their finances and are better equipped to become financially healthy. Each year, more than 1 million Americans file for personal bankruptcy.

What are my choices?

Bankruptcy isn’t a one size fits all type of deal. Personal bankruptcy exists in two key forms under American law – Chapter 7 and Chapter 13. Each form of personal bankruptcy suits a different scenario and adheres to different guidelines and rules.

With a Chapter 7 bankruptcy, the filer has all their eligible debts cleared. Except for alimony, child support, student loans, taxes, and criminal judgments, most unsecured debts are eligible for Chapter 7 under bankruptcy law. In exchange for the clearance of debts, the filer must relinquish parts of their property. The relinquished property is sold and the proceeds go towards paying some of the debts. For secured debts (such as a mortgage secured by a house), the filer will be forced to either keep making payments on the debt or have the property securing the debt repossessed.

With a Chapter 13 bankruptcy, the filer receives a repayment plan that spans over a period between three and five years. In this arrangement, the filer will not have to give up any personal property so long as they stay on top of their repayment plan. The Chapter 13 repayment plan restructures or reorganizes debts in a way that makes it easier for them to be paid back. For some secured debts, filers may receive an opportunity to catch up with past due payment as part of the repayment plan and then continue repaying debts.

The major difference between Chapter 7 and Chapter 13 has to do with their structures. Whereas a Chapter 7 bankruptcy wipes debts clean, a Chapter 13 sets up a repayment plan that requires a percentage of the filer’s debts be repaid. Other important differences include the treatment of secured debts and eligibility requirements.

The Filing Bankruptcy Process

The bankruptcy process takes a long time, many steps, and can be complicated. For most filers, consulting with a bankruptcy attorney is a good first step. Attorneys are professional and experienced, and most of all – they know the ins and outs of bankruptcy law and can advise you well.

In accordance with federal law, the first requirement of the formal bankruptcy process is the completion of a credit counseling class by the filer. All filers need to receive a certificate from a credit counseling agency approved by law, whether filing a Chapter 7 or Chapter 13.

In a Chapter 7, assuming the filer is eligible, the next step will be to file a petition, schedules (official statements showing financial information), and a statement of financial affairs. Gathering the information to file these forms can take time, and may involve other intermediary steps, such as assessing property. After all the necessary paperwork is filed and processed, the filer will be required to meet in court with the trustee and creditors. If the creditors make no objections to the bankruptcy, the filer will only have to take a financial management course before receiving discharge from the court. Discharge officially clears the unsecured debts covered under the bankruptcy.

The Chapter 13 filing process is similar to Chapter 7’s, but with several additional steps. In a Chapter 13, the filer must submit a repayment plan that defines regular payments (from disposable income) and other terms of the repayment plan. On top of other steps of the Chapter 7 filing process, Chapter 13 filers will need to attend a confirmation hearing and complete their repayment plan before receiving a discharge. Once a discharge is received, the balance of unsecured debts covered under the bankruptcy no longer need to be paid.

When to File Bankruptcy

Bankruptcy should start with a significant financial dilemma. Unless you have a genuine inability to pay your debts, a bankruptcy can potentially be more damaging than helpful. By filing a bankruptcy, a person may be able to get rid of a good deal of their debts – but they also may have to give up property and take a hit on their credit report. It is important to view and consider other alternatives such as financial planning or negotiation before filing bankruptcy.

If you do choose to file bankruptcy, you must first be eligible. To be eligible for a Chapter 13, the main requirements are sufficient income, no previous Chapter 13 within the past two years or Chapter 7 within the past four years, and debts less than $336,900 unsecured and $1,010,650 secured. To be eligible for a Chapter 7, the main requirements are passing the means test and not having another bankruptcy within the past eight years.