Bankruptcy is a legally declared inability or impairment of ability of an
individual or organization to pay their creditors. Creditors may file a
bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort
to recoup a portion of what they are owed or initiate a restructuring.
In the majority of cases, however, bankruptcy is initiated by the debtor
(a "voluntary bankruptcy" that is filed by the bankrupt individual or organization).
Can YOU accept the immediate consequences of bankruptcy?
Bankruptcy is the means of last resort to rebuilding your financial well-being.
Before you make a decision to file for bankruptcy, consider the following:
ruined credit, higher interest rates on new loans and credit cards,
higher insurance premiums, difficulty renting a new apartment?
Chapter 7 remains on your credit reports for seven to 10 years,Chapter 13 for seven.
Gather documents. When you meet with the lawyer, you will need pay stubs, deeds,
vehicle titles, tax returns and letters from collection agencies, among other paperwork.
Your list of creditors must be complete.
Can you avoid bankruptcy by cutting expenses, getting a second job,
negotiating with creditors to reduce your interest or payments.
Doing nothing about your debt is an option only if you're happy being a pauper.
If you have assets, your creditors can sue you and take them.
Judgments against you last for 10 years and can be renewed
for two additional 10-year periods.
Remember, bankruptcy is not a badge of dishonor.
Most people who file got in a hole because of divorce, a job loss or medical bills,
not because of flagrant overspending.
Most people who file had no alternative: Fewer than 5% of those who participate
in the credit-counseling session that's required before they can file have any resources
to pay off their debts.
Bankruptcy may be your best option if it will take more than five years
to pay off your unsecured debt, such as credit cards and medical bills.
Bankruptcy will not relieve you of secured debt -- where the creditor holds a lien
like a mortgage or car loans. It also won't end your obligation for most student loans,
child support, alimony or recent taxes.
If you decide that bankruptcy is necessary for your emotional and financial well-being.
Take these steps:
1) Hire a reputable attorney. The 2005 bankruptcy law increased the amount and complexity
of paperwork, including a "means test," needed to file. Beware of bankruptcy mills
that charge high fees for botched service.
2) Get credit counseling from an approved agency within 180 days of filing.
Don't run up your credit cards. Bankruptcy courts consider that fraud,
and you'll end up having to pay what you owe on the cards.
Don't deposit your money with the banks that issued your credit cards.
Banks typically have the right to seize other funds on deposit if a
credit card account becomes delinquent.
Use the American Bankruptcy Institute and the
National Association of Consumer Bankruptcy Attorneys as resources.
HRF can help you determin if Bankruptcy is your only option,
Our officers at HRF will also help in getting your documents in order.
For most people, there are two types of personal bankruptcy:
Chapter 7 requires the sale of nonexempt assets to reduce unsecured debt.
The remainder of your unsecured debt will be excused.
What's considered exempt varies from state to state.
You are allowed to keep your retirement accounts, and most people retain possession
of a car and their home if they keep making payments on them.
If your income exceeds the median for your family size in your state and the means test says
it's sufficient to make payments on your debt, you will be directed to file Chapter 13 instead.
Under Chapter 13, you keep your property and agree to a three- or five-year
repayment plan for some of your debt. If you follow the plan, the remainder
of your unsecured debt will be eliminated.
Chapter 13 is generally the better option if you've fallen behind on house payments
because the plan allows you to catch up.
After you file, an "automatic stay" stops all collection attempts. The stay is temporary for secured debt, so you need to make payments or face repossession or foreclosure. You'll attend a creditors meeting (creditors rarely attend), where a trustee will finalize your case. You'll be required to attend a finance management course.
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