Bankruptcy

There are many reasons for financial difficulties, such as loss of a job, too many credit cards, large medical expenses, marital problems and other large unexpected life changes. Money problems can be emotionally wrenching and seriously damage family relations. However disturbing the idea of bankruptcy might initially seem, in fact, bankruptcy laws exist to help people who are unable to pay their bills.

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Bankruptcies are a way for people with financial problems to eliminate some or all of their debts and gain a fresh start. Bankruptcies begin with the debtor filing a petition in bankruptcy court. The petition is usually completed by a lawyer. Filing the petition automatically stops most creditor actions, including harassing telephone calls, threatening letters, foreclosure proceedings, eviction proceedings and most lawsuits.

Types Of Bankruptcy

There are several chapters of bankruptcy a person can take advantage of in order to protect their assets, including:

  • Chapter 7. This Chapter of bankruptcy is for people whose income is less than their expenses and debts exceed their assets and ability to pay. In a Chapter 7 bankruptcy (also called a "Liquidation"), the debtor turns over all non-exempt property to a bankruptcy trustee, who then converts it to cash for distribution to creditors. Generally, most property of the average debtor is exempt and he or she continues to own them upon the conclusion of the case. The definition of "exempt property" differs in each state, and it can include clothing, furniture, household appliances, jewelry, tools of the trade, retirement plans and perhaps your home and car. In most Chapter 7 cases, the debtor receives a discharge releasing the debtor from personal liability for certain dischargeable debts. Normally, the discharge is received 90 days after the bankruptcy petition is filed.
  • Chapter 13. This Chapter of bankruptcy is designed for people who have a regular source of income and can work out a way to pay all or some of their debts over time. Under Chapter 13, the debtor is placed in a repayment plan approved by the bankruptcy court. He or she then makes payments to the bankruptcy trustee for distribution to creditors. The repayment plan usually lasts three to five years. The repayment plan can be used to extend the time to repay bills. Chapter 13 is very different from Chapter 7, since the Chapter 13 is usually designed so the debtor keeps possession of non-exempt property, provided the debtor, makes payments to creditors, through the trustee, based on his or her anticipated income over the life of the plan. The debtor must complete the payments required under the plan before the discharge is completed. While the plan is in effect, the debtor is protected from lawsuits, garnishments and other creditor actions, which arose prior to the bankruptcy filing. The Chapter 13 bankruptcies are only for people who meet certain financial requirements.
  • Chapter 11. These bankruptcies are used mostly by businesses. They allow a business to continue operating while it repays creditors pursuant to a payment plan.

Common Reasons For Filing Bankruptcy

Bankruptcy is a way for people with financial problems to get a fresh start. Bankruptcy might be advantageous if any of these situations apply to you:

  • You recently lost your job and have a large amount of debt.
  • You are starting to drain your savings and retirement accounts.
  • You have recently been denied credit.
  • You took on too much credit card debt and are having trouble making minimum payments.
  • You are finding it hard to pay for essentials like food, clothing and shelter.
  • Your credit cards are charged to the limit and you have no other sources of borrowing.
  • Bill collectors are writing or calling and threatening to take legal action against you.
  • You are having problems paying your student loan debts or taxes.

The Bankruptcy Discharge

A main goal of filing bankruptcy is to obtain relief from burdensome debt. Relief is achieved through the bankruptcy discharge. A discharge is a release of the debtor from personal liability for certain types of debts. In other words, the debtor is no longer required by law to pay these debts. The discharge is a permanent order to the creditors to stop all collection action on discharged debts, including legal action and communications like calls and letters. If the creditor tries to collect a discharged debt, the debtor can ask a court to impose sanctions, including fines.
When does the bankruptcy discharge occur? The timing of the discharge varies depending on the chapter of bankruptcy. In a Chapter 7 case, the discharge usually occurs when the time for filing a complaint objecting to the discharge expires, which is typically about 90 days from when the debtor files the petition. In a Chapter 13 case, the discharge is granted by the court as soon as practicable after the debtor completes all payments under the plan (usually three to five years).

Are all debts discharged or only some? Not all debts are discharged. The most common types of debts that cannot be discharged are certain tax claims, student loans, debts for spousal or child support, debts for intentional injury to person or property, and government fines and penalties.