It's a homeowner's worst nightmare -- someone coming to take away your house. The worst part of being in debt is the constant fear that one day you'll wake up and have nothing. When you've reached the point where your debt equals 50 percent or more of your income, bankruptcy may be your only way out of a sticky situation.
What Is Bankruptcy?
Bankruptcy is the legal declaration of an individual's or organization's inability to pay its creditors. Through either a process of debt reorganization or through asset liquidation, the governing Bankruptcy Court will oversee the debtor's path toward paying off their debts.
How It Works
The process of bankruptcy depends on the type of bankruptcy an individual files. While there are currently six types of bankruptcy under the U.S. Bankruptcy Code -- Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13 and Chapter 15 -- there are two that are most common.
Chapter 7 bankruptcy involves the basic liquidation of assets to pay off a debtor's balances. Under Chapter 7, a debtor who qualifies under the "means test" of the Bankruptcy code will surrender all non-exempt property to a bankruptcy trustee, who then liquidates the property. The proceeds of this liquidation go toward paying the debtor's creditors, and in exchange, creditors will -- barring illegal concealment of assets -- grant a discharge. This discharge value varies by state, and creditors still have the ability to repossess any of the debtor's assets.
Chapter 13 bankruptcy is only available to debtors who have the regular income means to pay off their debt over time. Chapter 13 allows qualifying debtors to go under financial reorganization, which is supervised by a federal bankruptcy court. This plan typically proposes that the debtor pay his/her creditors over a three- to five-year period. Under Chapter 13, creditors may not attempt to collect on any previously incurred debt without court approval.
No matter your chapter bankruptcy, attorneys are necessary. While a debtor is not required by law to have legal representation, the bankruptcy process is vigorous and complicated, so a court representative is a valuable tool. Not only can they better understand the terms and agreements of a debtor's bankruptcy contract, but they can also better argue a debtor's case in court, where many of these terms are decided. However, attorney's costs and court fees should be taken into account when calculating the budgetary implications of filing for bankruptcy.
Some benefits of bankruptcy include the cease of any creditors or collectors bothering the filer. Any issues the creditors have must be directed to the courts and the debtor's legal representation. Bankruptcy also offers the opportunity for a debtor to retain certain property that they may find invaluable, such as a home or car.
Bankruptcy filings will always mar the debtor's credit report. Chapter 7 filings remain on a debtor's credit report for 10 years, and Chapter 13 filings remain on the credit report for seven. During these periods, any company who checks your credit will be able to see the bankruptcy filing, making receiving any further credit very difficult. In fact, under Chapter 13, a debtor may not incur any further debt without first receiving permission from the courts. Also, many employers will ask during the interview or review process whether you have ever filed for bankruptcy; any false denial of bankruptcy -- even outside the credit report period -- is illegal and can result in charges upon the debtor.
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was passed, enacting many changes to the bankruptcy code in order to make fewer people eligible and therefore prevent any abuses of the program. Among these changes was the means test, requiring a debtor's monthly income be lower than the median income of their state. Also, a filer of bankruptcy must wait longer between filings, eight years. Perhaps the biggest change to the bankruptcy eligibility laws was that all bankruptcy filers must take place in an individual or group briefing from a nonprofit budget and credit counseling agency.
So It's Time for Bankruptcy
Many financial experts tell their employees to avoid bankruptcy at all costs, due to the lifelong challenges it presents. However, should you decide to file for bankruptcy, there are some steps to take in order to ensure the system's ease. First, enroll in credit counseling. Not only is credit counseling required now by law before filing for bankruptcy, but it also teaches the debtor many alternative methods to bankruptcy, including debt consolidation, debt management programs (DMPs) and much more.
When filing for bankruptcy, find a very reliable attorney. While the costs of an attorney and court fees may be high, their expertise and ability to fight for you in court make their services invaluable. Before going to an attorney, however, be sure to find any and all paperwork that exists regarding your debt, assets, credit payments, etc. to present. Much of it will be included in and important to the process. Even the smallest discrepancies can cause your bankruptcy filing to be denied.