If you have been out of a job for the last few months and are now faced with a substantial amount of bills that you have no idea how to pay, you may start entertaining the idea of filing for bankruptcy.
While some creditors are fairly compassionate to people who are undergoing financial hardship, some of then can also be very insensitive especially if there’s a very substantial amount involved.
By default, people automatically think of what is referred to as Chapter 7, relief from debt, when the word bankruptcy is mentioned. Other types include Chapter 11 for businesses to undergo reorganization and Chapter 13 for restructuring debt.
Under Chapter 7 bankruptcy, there is no plan for debt repayment unlike 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. Nonexempt assets, which could include any luxury items purchased on credit in the last 90 days or “spare” vehicles on which there is no lien, may be gathered and sold to pay a portion of the debt. 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 are below your state’s median income, then you may qualify for chapter 7 regardless of the amount of your debt. You are not eligible to file for Chapter 7 however if you underwent credit counseling in the past six months or had a bankruptcy case dismissed because you were unable to comply with the requirements or dropped out of the case by your own preference.
Because bankruptcy is a complex issue involving a lot of paperwork, you will probably want to hire a local attorney or find a firm specializing in bankruptcy that can handle your case on-line and by phone.
The case starts with an official petition, dates and a presentation of your financial statement in bankruptcy court. Once this petition is filed, creditors can no longer try to collect your debts, either through seizing property or filing suits. Any creditor who violates this stay, even a utility shut-off, can be held in contempt of court and ordered to pay you damages.
While bankruptcy may sound like a win-win when creditors are on the phone, there is a downside. Because non-exempt properties will be sold in order to pay off your debts, it’s possible you might lose that vacation home or family heirloom; it will reflect on your credit history for 10 years and will form part of public record; and the cost of bankruptcy itself is quite high with the inclusion of court fees, trustee’s fees, consumer counseling and financial education courses, and we haven’t even talked about the cost of hiring an attorney yet.
If you think chapter 7 bankruptcy may be the solution for you, begin by looking up the means test for bankruptcy in your state and comparing your income to the state’s income threshold. If you cannot meet this test, then look for other solutions by contacting creditors or debt counselors. When you’re still undecided or believe that is the course for you, set up an initial appointment with an attorney to discuss the process. When all the facts are in, the decision is now entirely up to you.
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Tags: Bankruptcy, finance