Is Bankruptcy The Solution?

August 2nd, 2010 | Author: Claire Gallagher

If you have been out of a job for the last few months and are now faced with a substantial amount of bills that you have no idea how to pay, you may start entertaining the idea of filing for bankruptcy.

While many creditors will work with a person in hardship cases, some will not and at other times the amount involved is so much there is no alternative.

Typically, when individuals think of bankruptcy, we think of what is referred to as chapter 7, which is relief from debt. There are two additional types – chapter 11, which is commonly used by businesses to adjust debts or reorganize, and chapter 13, which is another type of debt restructuring available to sole proprietorship businesses and individuals who do not meet the requirements for chapter 7.

In chapter 7 bankruptcy, there is no plan for repayment of debts as in other types. A bankruptcy trustee assesses your property and determines what may be exempt, such as a home, car, or property under a lien for which you wish to reaffirm the debt. Non-exempt assets which include any luxury items bought on credit for the past three months, or extra vehicles for which there is no lien attached, shall be collected and sold in order to pay off part of your debt. The Bankruptcy Code allows debtors to keep certain “exempt” property and to use unclaimed equity in a home to essentially buy down the value of other nonexempt property they wish to retain.

A means test, which scrutinizes your average income over the past six months, is employed to assess if you can qualify for Chapter 7 relief or not. If you fall short of your state’s median income, you automatically qualify for Chapter 7 regardless of the amount of your liability. However, those who took some form of credit counseling during the past six months or dropped out of a bankruptcy case voluntarily or were unable to comply with the requirements, will not be able to apply for Chapter 7 relief.

Since bankruptcy is a complicated case which necessitates tons of paperwork, it would be prudent for you to look for an attorney or firm specializing on bankruptcy based locally to work with you regularly online and by phone.

The case will begin with the filing of an official petition, schedules and a statement of financial affairs in bankruptcy court. Once the petition has already been filed, creditors are frozen from collecting your liabilities, either by annexing your property or filing a case against you. Any creditor found violating this hold order, even utility-shutoff, will be charged in contempt of court and ordered to pay you corresponding damages.

Bankruptcy may be a win-win prospect especially when you are talking to creditors on the phone, but there is certainly a huge disadvantage in doing it as well. Nonexempt property will be sold to pay creditors, so you might lose a vacation home or family heirloom; it will become part of your credit history for 10 years as well as part of the public record; and the costs of bankruptcy itself can be steep and include court fees, trustee’s fees, consumer counseling and a financial education course, even without an attorney.

If you think chapter 7 bankruptcy may be the solution for you, begin by looking up the means test for bankruptcy in your state and comparing your income to the state’s income threshold. If you cannot meet this test, then look for other solutions by contacting creditors or debt counselors. When you’re still undecided or believe that is the course for you, set up an initial appointment with an attorney to discuss the process. When all the facts are in, the decision is now entirely up to you.

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Is Bankruptcy The Solution?

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