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The Truth About Bankruptcy

Bankruptcy should be the absolute last resort. Many people mistakenly look at it as a "quick fix" to financial troubles. For people who are behind on credit card payments, bankruptcy has become increasingly resorted to. Bankruptcy is designed for people caught in severe financial circumstances beyond their control such as illness or loss of a job. While some debts will be eliminated, others such as alimony or child support will not be discharged. Most consumers file either a Chapter 7 or Chapter 13 petition.

 

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provides for the most sweeping changes made to the federal bankruptcy laws since the enactment of the Bankruptcy Code in 1978.


The intent of the act is to increase fiscal responsibility for those individuals and businesses filing bankruptcy, and to ensure that there is adequate substantiation behind the filings.



Chapter 7

Is often referred to as a "straight" bankruptcy or liquidation. This is used by individuals with no steady income and few assets, Most personal bankruptcies are filed under chapter 7. It eliminates most debts but also requires immediate liquidation of most assets. In this form of bankruptcy you would agree to turn over all of your non-exempt assets to a Chapter 7 trustee. The trustee will then sell your assets and distribute the money to your creditors. Exempt assets aren't part of the bankruptcy estate and remain your property. In most cases, bankrupt people can keep a small equity in their homes, an inexpensive car and limited personal property. State law and court practice will determine the amount of flexibility you have in keeping assets out of the bankruptcy estate.

Chapter 13 bankruptcy

Also referred to the wage earner plan is used by people with regular incomes and less than $250,000 in unsecured debt and less than $750,000 in secured debt. It is a reorganization of the debtor's obligations. The chapter 13 process recognizes rather than liquidates the debtors assets, a repayment plan is designed to pay off as much of the debt as possible. The repayment plan occurs over 3 to 5 years and would be made to the chapter 13 trustee who disperses it to the creditors. This works much the same as a credit counseling (debt consolidation) repayment plan.

Some debts that aren't eligible to be discharged in a Chapter 7 filing, may however be eligible for discharge in a Chapter 13 filing. Don't make the mistake of filing for bankruptcy only to find out that the debts you need to have discharged aren't eligible to be discharged. Debt you can't discharge in a Chapter 7 bankruptcy filing include: most student loans, alimony, child support, debts incurred through fraud, and liabilities resulting from drunk driving, criminal fees, penalties and restitution.

Bankruptcy is not the absolute cure most are led to believe. Here are just some of the post Bankruptcy Blues:

First, it costs money to hire an attorney and file the necessary paperwork in court.

  • Second, not all of your debts will be discharged. If you owe taxes, alimony or child support, or student loans you will still have to pay these debts.
  • Third, all of the debt that you discharge becomes a loss to the creditors who are not likely to deal with you again in the future.
  • Lastly, the bankruptcy will be on your credit report for 10 years or more depending on which type you file. Although you may be able to obtain credit after a bankruptcy you will pay much higher interest rates and fees.
  • It has a negative impact on a credit report and can make it difficult to purchase a home, rent an apartment or even get a job.
  • Persons who file bankruptcy are considered poor credit risks and most often pay high interest rates or use secured credit cards.
  • Bankruptcy causes feelings of guilt or embarrassment.

 


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