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.
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
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.
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
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
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.
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.