Bankruptcy Options

Bankruptcy Options

Introduction

Bankruptcy is a legal process designed for individuals and businesses struggling with overwhelming debt. It offers a path to financial relief, though it comes with significant consequences. Understanding the various Debt Management options available, and specifically the different types of bankruptcy, is crucial for anyone facing severe financial hardship. This article provides a comprehensive overview of bankruptcy options, aimed at beginners, covering the common types, their implications, and considerations before filing. We will also briefly touch upon alternatives to bankruptcy.

Understanding Bankruptcy

Bankruptcy isn't a single event; it's a legal framework governed by federal law (the U.S. Bankruptcy Code). The primary goal is to give debtors a “fresh start” by either liquidating assets to pay off creditors (liquidation bankruptcy) or reorganizing debts to become more manageable (reorganization bankruptcy). It is important to note that bankruptcy remains on your credit report for a period of 7-10 years, impacting your ability to secure loans, credit cards, and even rent an apartment. Therefore, exploring all available resources and strategies for Financial Planning is essential before considering bankruptcy.

Types of Bankruptcy for Individuals

The most common types of bankruptcy filed by individuals are Chapter 7, Chapter 11, and Chapter 13.

Chapter 7 Bankruptcy (Liquidation)

Overview:* Chapter 7 is often referred to as "liquidation bankruptcy" because it involves selling off non-exempt assets to pay creditors. It's generally the simplest and quickest form of bankruptcy, often taking only a few months to complete.

Eligibility:* To qualify for Chapter 7, you must pass the "means test." This test assesses your income against the median income for your state. If your income is below the median, you generally qualify. If it’s above, a more detailed calculation is performed to determine if you have enough disposable income to repay a portion of your debts. Factors influencing the means test include salary, wages, and other forms of income.

Process:*

1. *Credit Counseling:* You must complete a credit counseling course before filing. 2. *Filing the Petition:* A detailed petition outlining your assets, liabilities, income, and expenses is filed with the bankruptcy court. 3. *Automatic Stay:* Upon filing, an "automatic stay" goes into effect, halting most collection actions against you, including lawsuits, wage garnishments, and foreclosures. 4. *Meeting of Creditors:* You will attend a meeting with your creditors (known as a 341 meeting) where they can ask you questions about your finances. 5. *Liquidation of Assets:* The bankruptcy trustee will identify and sell non-exempt assets. Exempt assets vary by state and may include things like a certain amount of equity in your home, personal belongings, and retirement accounts. 6. *Discharge:* After the liquidation process, the court will issue a discharge, eliminating your legal obligation to pay most of your debts.

Debts Typically Discharged:* Credit card debt, medical bills, personal loans, and most unsecured debts are typically discharged in Chapter 7.

Debts Typically Not Discharged:* Student loans (extremely difficult to discharge), child support, alimony, certain taxes, and debts obtained through fraud.

Impact on Credit:* Chapter 7 has a significant negative impact on your Credit Score, remaining on your report for 10 years.

Chapter 13 Bankruptcy (Reorganization)

Overview:* Chapter 13 is a "reorganization bankruptcy" that allows individuals with regular income to create a repayment plan to pay off their debts over a period of three to five years.

Eligibility:* You must have a regular source of income and enough disposable income to make the required payments under the plan. Debt limits also apply – there are maximum amounts of secured and unsecured debt you can have to qualify for Chapter 13.

Process:*

1. *Credit Counseling:* Similar to Chapter 7, you must complete a credit counseling course. 2. *Filing the Petition:* A petition detailing your finances is filed with the court. 3. *Automatic Stay:* An automatic stay goes into effect, similar to Chapter 7. 4. *Repayment Plan:* You propose a repayment plan to the court outlining how you will pay off your debts. The plan must be approved by the court and creditors. 5. *Plan Payments:* You make regular payments to the bankruptcy trustee, who distributes the funds to your creditors. 6. *Discharge:* Upon successful completion of the repayment plan, the remaining dischargeable debts are discharged.

Benefits of Chapter 13:* Allows you to keep your assets, including your home and car, as long as you continue to make the required payments. It can also stop foreclosure proceedings.

Debts Typically Discharged:* Similar to Chapter 7, but may also allow for the partial discharge of certain debts, like home mortgage arrears.

Impact on Credit:* Chapter 13 also negatively impacts your credit, remaining on your report for 7 years. However, demonstrating successful completion of the repayment plan can improve your credit over time.

Chapter 11 Bankruptcy (Reorganization - Individuals)

Overview:* While traditionally used by businesses, Chapter 11 can also be used by high-income, high-asset individuals who do not qualify for Chapter 7 or 13. It's a more complex and expensive process than Chapters 7 and 13. It involves creating a reorganization plan to repay debts over time.

Eligibility:* No specific income or debt limits apply, but it's generally reserved for individuals with significant assets and debts.

Process:* Similar to Chapter 13, but with more complex procedures and court oversight. It often involves negotiating with creditors and developing a detailed reorganization plan.

Impact on Credit:* The impact on credit is substantial and long-lasting.