Is Bankruptcy the Answer?

If you’ve suddenly lost your job, been out of work for months, or are hit with massive bills you cannot handle, you may find yourself considering bankruptcy.

While many creditors in fact are lenient enough in treating people who are on financial hardship, it cannot be denied that some would also be understandably harsh especially when the amount involved is very significant.

When the word bankruptcy is mentioned people instantly think of what is commonly known as Chapter 7, or 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 mention of a debt repayment plan in contrast to the other types. A bankruptcy trustee appraises all your assets and decides which of them may be considered exempt such as a home, car, or other properties under lien which you would like to confirm. Non-exempt assets shall be collected and sold to settle a portion of your debt. Non-exempt assets includes luxury items acquired for the past 90 days, even on credit, and additional cars with no liens attached. The Bankruptcy Code authorizes the debtors to hold on to certain “exempt” assets and draw on any unclaimed equity on their home in order to decrease the value of other non-exempt assets which they wish to maintain.

To qualify for chapter 7 relief, you are subject to a means test, which looks at your monthly income averaged over the previous six months. If you fall short of your state’s median income, you automatically qualify for Chapter 7 regardless of the amount of your liability. However, you cannot file if in the last six months you have received certain types of credit counseling or had a bankruptcy case dismissed because you did not comply with requirements or voluntarily dropped the case.

Bankruptcy is a complicated matter which demands a lot of paperwork, so it would be wise for you to hook up with a local lawyer or firm specializing on bankruptcy who can work with you via the internet 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 been officially filed, creditors are no longer able to go after your debts by either sequestering your property or filing cases against you. Any creditor who violates this stay, even a utility shut-off, can be held in contempt of court and ordered to pay you damages.

Even though bankruptcy seems like a win-win solution when you have creditors on the phone, there is definitely a huge downside to it. 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 believe that Chapter 7 may provide the answer for you, then start assessing by researching the means test for bankruptcy in your state and weigh your income against the state’s income threshold. If you cannot meet this test, then look for other solutions by contacting creditors or debt counselors. If you still can’t make up your mind try asking for an appointment with a lawyer immediately in order to discuss the procedure. Once you have all the facts, the final decision is up to you and one only you can make.

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