If you have a lot more debt than you can handle, then you may decide that Bankruptcy can make sense for you. When your debt gets out of hand -- usually from factors beyond your control like illness or unemployment -- bankruptcy is a strategy you may need to consider, to eliminate most or all of your debt. Of course deciding if and when you need to file for bankruptcy is only half the battte. While there are some alternative ways to handle your debt, this last resort method, while damaging your credit rating, can clear the shelves and give you a new start on managing your budget and finances.
Chapter 7 Versus Chapter 13 Bankruptcy
The two main types of bankruptcies used by individuals or families are Chapter 7, and Chapter 13; these are named for the place you could find them if you read the most recently passed laws on bankruptcy.
Chapter 7, the most commonly used, is meant to liquidate your assets (while clearing nearly all of your debts) so you can get a fresh start. Chapter 13 is designed to reorganize your financial life, giving you, as an individual time to bring yourself and your debts in order, and square things.
Chapter 13 is the best way to use bankruptcy to save your home from foreclosure, but it requires a steady source of income that can handle basic expenses and eventually pay down your debts. If you do not have good reliable future prospects, you probably will need to use Chapter 7. In Chapter 7 you will not have much luck in stopping a foreclosure, but you will be able to put it off for several months.
Other forms of Bankruptcy include chapter 11 for Businesses and humongous debts, and Chapter 12, for individuals whose problems stem from the family farm's business.
Information on the Chapter 7 Process
Chapter 7 takes at least 3 months, but typically lasts longer than that, and when it is done most of your creditors are out of luck, and you no longer have to pay them or put up with harassing collection efforts. In fact, once you have filed for it, they are required by law to stop, at least temporarily, collecting the debt. If you can afford an attorney, then the process is difficult enough that you should get one, at the very least to consult with you. However, if you are trying to do it without an attorney, then you need to start looking around for help. An article I wrote on How-to-File-for-Bankruptcy-Without-an-Attorney can get you started.
When you begin, you need to complete a large number of forms that you can obtain from the US Bankruptcy Court. The case will begin when you file a packet of forms, and submit them to the regional court nearest to where you reside. You can start sooner, by completing just the initial petition and a few other documents, but there is so little time after that to complete the other forms that is it best to do them all at once. Once you see these forms you will see why many people get an attorney to help. You will also need to take a credit counseling class, in an approved company.
Once You Have Filed
When you file for Chapter 7, a trustee is assigned to your case, and that trustee tells you and all of your creditors, about a Meeting Of Creditors hearing they schedule. You have a month or so after you file, to prepare to meet with the trustee, and any creditors who want to dispute what you have claimed in your paperwork. In chapter 7, especially if you have few assets and your paperwork is in order and honestly completed, there is a good chance the only questions you will need to answer are from the trustee. The Trustee is in charge and no judge is present at the meeting.
The End of the Process
If your case is straightforward, that may be almost the end. You will need to take still another class, this one designed to have you learn how to budget (to avoid falling in the same pit) and when the case is closed most of your debts are discharged. The main things that do not get reconciled are taxes, real estate issues (for example, in Chapter 7 most likely you will just delay any foreclosure effort), and debts like student loans and some liens.
Afterwards
After your bankruptcy is over, you can start again. Will you be able to be self sufficient now, even if a new catastrophe occurs? In order to answer that question affirmatively you need to take the above mentioned budgeting course seriously.
Disclaimer
This discussion is meant to be educational and does not constitute advice, legal or otherwise, since particulars of your situation may well be different. Photo Credit to Taber Andrew Bain .
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