Types of Personal Bankruptcy.
No one wants to wind up in bankruptcy, but in some cases, it is the only option to get a fresh start – here are the basics.
First, there are two types of personal bankruptcy. Chapter 7 bankruptcy is where your non-exempt assets are liquidated to pay-off as much debt as possible and then the remaining balances are written off. Most often, your home, vehicles, and retirement accounts are exempt.
With a Chapter 13 bankruptcy, a judge will assess your situation and designate a trustee to establish a payment schedule to pay-off your debts. This chapter is normally used for people who are behind on their mortgage payments, back taxes or who have child support issues.
You will make payments every month until the debts are satisfied according to the court-approved repayment plan.
Once the payments are complete, any remaining balances are written off. Every filing requires a means test.
A means test is where your income level is compared to the median income in your state. This determines if you qualify to file and what type of bankruptcy you can elect. You’ll be required to go through financial counseling to receive a certificate before you file.
Chapter 13 bankruptcy can be a better option than Chapter 7 bankruptcy if you have assets that you want to protect. Filing for bankruptcy can stop the foreclosure process if the bank is trying to take your home.
A chapter 13 bankruptcy will stay on your credit report for 7 years. And a chapter 7 bankruptcy will stay on your report up to 10 years.
Having these negative marks on your credit report may make it difficult to qualify for loans and new lines of credit for a period of time, but it’s not impossible and you can take steps to rebuild your credit again.
To get started, simply fill out our form or better yet, call us now, and we’ll match you with the best solution for your situation. We are A- plus rated by the better business bureau and have helped thousands of people become financially stable.
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Let’s be honest – bankruptcy is never easy. But the better prepared you are for what’s to come, the easier it will be to work through the process.
What’s more, knowing what to expect when you file can help make the road ahead easier as you wait to get your final judgment. With a solid understanding of what’s to come, you can prepare yourself and your finances as much as possible.
Fact: Personal bankruptcy can take anywhere from 90 days to five years, depending on the type of filing
Here is what you can expect once you file…
Two paths through the bankruptcy process
You have two options when you declare bankruptcy.
- Chapter 7 bankruptcy discharges your debts by liquidating your assets. This means you may have to give up your home, car and other assets like art, antiques, or businesses in order to settle your case.
- In Chapter 13 bankruptcy, you are required to pay back at least a portion of your debts on a court-ordered payment schedule. However, on a high note, your assets are safe. So you can go bankrupt without losing your home.
A snapshot of the filing process
It’s always recommended to get a bankruptcy attorney. The paperwork isn’t actually that hard to file, but the process itself can be tricky and you want to have a legal expert on your side to make sure everything is going smoothly.
Once your case is filed, a trustee will be assigned to review the paperwork and your debts in a “means test” to make sure you’re not committing fraud. Stipulations under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) provide banks and creditors with a way to protect themselves from fraudulent practices.
That may sound a little scary, but really, as long as you’re not gaming the system – like running up a bunch of debt on new credit cards right before you file – you should be fine. Really, the means test will just confirm if you’re eligible for bankruptcy and which type you should file.
Fact: The means test was challenged after Hurricane Katrina, when many people above the poverty line were forced to legitimately file due to extreme circumstances.
Things to know as you file
Think bankruptcy is a free ticket to a fresh start when you’ve messed up? Not really. You need to know…
- Not all of your debts are wiped out with bankruptcy. Things like court-ordered child support and alimony can’t be discharged. Tax debt and federal student loans are usually not dischargeable.
- You must list all of your debts in your filing. In some cases, people try to keep one or two debts out with the intent that once the bankruptcy is final, they can at least pay that debt back. If you have reasons you want to pay a particular debt, your attorney can enter a reaffirmation agreement on your behalf.
- You can be held responsible for recently incurred debts. Most of the BAPCPA guidelines focus on preventing people from racking up debt just prior to filing. If you go out on one last shopping spree on your credit cards before you file, your creditor can move that these are fraudulent charges. In that case, the debts can’t be discharged. Even worse, your entire bankruptcy case can get thrown out.
- You won’t lose the shirt off your back. While bankruptcy law varies from state to state, every state has exemptions in what can and can’t be taken. Clothes and household goods are almost always protected. Your car and even a home (up to a certain value) may also be protected. Qualified retirement plans (IRA/401(k)) are typically safe, too.
What bankruptcy can do to help you
Bankruptcy isn’t a free ride, but it’s also not the end of your financial world. In truth if you file correctly, it can help you hold on to some of your most valuable assets and get a fresh start at the same time.
You just need to be smart about it, file when it’s time to put a period on things, and hire a good attorney. Not convinced?
Assets timely bankruptcy filing can help protect:
- Your IRA and 401(k) are both typically protected in bankruptcy
- Any 529 college savings plan is usually protected
- In some cases, you can even save your home from foreclosure in a bankruptcy decree, depending on where you live
- The same is true for your car loan
- Bankruptcy stops wage garnishment
- In most cases it can also stop a pending lawsuit on your debt
Article last modified on May 6, 2019. Published by Debt.com, LLC