| Understanding Bankruptcy
When you are forced to declare yourself bankrupt it is one way of
dealing with debts you can no longer manage. But it is not a decision
that should be taken lightly. Bankruptcy is a serious matter that will
affect the way you are dealt with by the creditors you wish to establish
a relationship for many years after you've been discharged.
Bankruptcy is not a fun thing to do or an easy out for those who are
buried in debt. It is a way to help those who simply can’t see a way out
of debt and who don’t have the means to pay their debts to get the help
that they need. Basically how it works is that you declare yourself
bankrupt and the government covers your debt and you are rendered to
creditors as ‘broke’. This inevitably means that your record will show
that you couldn’t pay your debts. This makes it very hard for creditors
to trust you.
Recent Bankruptcy changes
The bankruptcy laws changed in April 2004, and these changes made it
easier for people to declare themselves bankrupt by reducing the time it
takes to get rid of bankruptcy from three years to one year or less.
This change was meant to assist people in getting back on their feet
again. For private individuals; which are those that are not running
businesses, the effects of personal bankruptcy can be far harder to deal
with.
Pros and cons to Bankruptcy
The fact is that you shouldn’t become bankrupt just because you're
struggling with debts. Like I said before, this should only be used as
your last resort. The reason for this is because you may be required to
give up most of your belongings as a result of it. Some of these might
include; salary and any investment in your house.
If you own any property or shares in businesses these may have to be
sold to pay back the money you owe as well. This means that you could
lose your family’s house should you decide to go bankrupt. Even if it is
jointly owned by you and a spouse or parent, you may be forced to sell
it so your share of the proceeds can be used to repay debts.
I will say though that under new rules, if the trustee that is appointed
by the court has not sold the bankrupt's home within three years, it no
longer counts as part of the estate and may not be reclaimed by you. I
wouldn’t hold my breath though. This isn’t all you could lose either. If
you come into any money while the bankruptcy order is still in place,
this could also be taken away from you. This money could come from the
lottery, or an inheritance. Of course, you could also find yourself
credit blacklisted for up to 15 years. So you should really think before
filing for bankruptcy.
Bankruptcy is best for someone with considerable debts, no income and no
assets.
The people it has the highest effect on are those that actually have
equity in property, disposable income and people that have professional
qualifications because they stand to lose the most. For example, a
lawyer should try to avoid it because they won't be able to practice law
once they have filed for bankruptcy.
The alternatives to Filing for Bankruptcy
You could write to your creditors and seek an informal arrangement that
allows you to pay back your debts over a specific time that they agree
on. The only disadvantage to doing this is that it won't be legally
binding and your creditor might choose to ignore it later on and seek
direct payment.
If your debts are relatively small like $5000 or less and you have a
regular income the court may agree to set up an order so that you can
pay your creditors each month but through the court. Of course, for
debts this small a credit union might be your best bet. These are
basically just banks that are set up to direct your wages toward your
debtors, but they will also help to reduce the payments for you and in
some cases even delete some of your creditors all together.
If you do have severe debt problems, such as debts over $10,000, you may
have to turn to bankruptcy to help you. You may also set up payment
arrangements with your creditors. You can make an agreement between you
and your creditors that will allow you to repay a percentage of the debt
over a set period of time, which is usually around five years.
The advantage to doing this is that you will have more control over your
assets, have fewer restrictions and you won't be categorized as
bankrupt. This is excellent should you be running your own business.
However, sometimes, filing for bankruptcy is all that you can do. In
this case, it helps to know the exact process. That is what the next
section will help you with.
THE BANKRUPTCY PROCESS
If you are thinking of making yourself bankrupt, it is absolutely
necessary that you get your own legal or financial advice from a lawyer
or legal representative, a qualified accountant, or a reputable
financial adviser. You can’t go it alone and expect everything to work
out. When you file for bankruptcy you have to represent by someone that
is certified to stand on your behalf.
Declare yourself bankrupt
You will then have to file all necessary paperwork to ensure that your
case is handled quickly. Your bankruptcy petition will look at your
income and you debts. You will list them all. I would suggest that you
get a copy of your report so that you can accurately record all of your
debts and clear up any debts that were written by error.
If you dispute the creditor's claim, you should try and reach a
settlement before you file your bankruptcy claim. Trying to do so after
the bankruptcy order is made will be difficult and extremely expensive.
You will then have to take your bankruptcy claim to the courts. Once the
bankruptcy order has been made it will be noted on your credit report
and stay there for a period of up to 7 years. This was just a brief
account of how to go about filing for bankruptcy, as this is book about
getting out from under bankruptcy’s shadow.
Chapter 13 Bankruptcy
When someone files for bankruptcy under Chapter 13, their goal is to
have the opportunity to repay some or all of the debts that they have
acquired in their name. This is different from a Chapter 7 which uses
asset liquidation to recover from the debt. Chapter 13 allows the debtor
to use whatever income they may have in the future to pay off the
creditors.
I shouldn’t have to state that filing Chapter 13 Bankruptcy is great for
someone that actually has a steady income, and can afford to ask for
payment adjustments, or reductions.
The United States Bankruptcy Code gives the debtor a time span of 5
years to pay off your debts. While the attorney who represents you will
safeguard your interests, the entire process is carried out under the
supervision of the courts.
While debtors are allowed to keep all of their property that is
considered an asset, the court has to pre-approve a new interest-free
plan for repayment of the debt. A written plan will be created that will
outline all of the expected transactions, and the expected duration.
The repayment must begin within thirty to forty-five days after the case
has started. You will not have to deal with the transitory stage of
having a middle man do the payment like you will get in Chapter 7
Bankruptcy. Although in some cases people may involve a trustee who
would take care of paying out the money to the creditors if they want
to.
According to the law, the creditors must strictly stick to the repayment
plan that is approved by the court and they can’t collect any claims
from the debtor personally. Your attorney will prepare new repayment
plan that best works for you.
The one advantage of Chapter 13 over Chapter 7 Bankruptcy is the full
discharge option that is not available in chapter 7. For example, if a
debtor manages to complete all of their payments that are set up in the
plan, he/she is given a full plan discharge. Also repayment can be
created even if creditors disagree with it, as long as it is approved by
the Court.
To be eligible for chapter 13 bankruptcy, you must have a regular
income. There are a few other items needed for filing a Chapter 13
Bankruptcy. Just ask your lawyer to explain them.
Chapter 7 Bankruptcy
If filing for bankruptcy is an opportunity for a debtor to emerge out of
a financial crisis and start afresh, then Chapter 7 of the Bankruptcy
Code is the way to do it a bit quicker. Under Chapter 7 of the
Bankruptcy Code all property that is considered to be non-exempt is sold
and the proceeds are distributed to the creditors. In most cases where
Chapter 7 is brought into play there are no assets to lose so it really
is quicker.
This method is also called liquidation because you will turn your assets
into cash. Chapter 7 Bankruptcy is the most common form of bankruptcy
filing and makes up about 65% of all bankruptcy filings.
Like I said it is one of the faster ways; especially if you don’t have
to get other asset owners involved. Chapter 7 lets you get rid of your
debts in months of the attorney filing a bankruptcy petition as opposed
to years that go with filing for Chapter 13.
This type of bankruptcy works by getting a trustee to collect all of
your non-exempt property, sell the assets and distributes proceeds from
this sale to appropriate creditors on your behalf and you don’t have to
pay them to do it. Most of the time this means that you will lose all
your assets, so it is best to think before you do it.
Under Chapter 7 Bankruptcy, the debtor receives a discharge on all
dischargeable debts. Some of these debts are: child support, taxes and
student loans that are discharged under Chapter 7 Bankruptcy.
An added advantage with Chapter 7 bankruptcy is that by signing a
reaffirmation agreement you can continue to pay for a car loan or a
mortgage. This agreement is in place because as per the US Government
Bankruptcy Code a debtor could be allowed to retain some or all of his
property.
This is best people for this type of bankruptcy plan are those that do
not have a steady income coming in. To file you have to get a lawyer to
represent you to the court and simply do as they advise you to. Be sure
the information you provide is complete and correct.
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