Bankruptcy: An Overview

Tanya Davis

If you are overwhelmed with debt, you may be wondering whether bankruptcy is a viable option to help you get out from under the bills. You, like millions of Americans, may have fallen into a mountain of debt through no real fault of your own. You may have gone through a divorce or lost your job. You may have suffered an illness or injury, and suddenly found yourself unable to pay the bills you have accumulated.

Bankruptcy is a process that helps individuals and businesses either eliminate or rearrange their debts. This process is conducted through the federal court system.  In a certain sense it offers you a chance to start over with a clean slate. However, there are several downsides to filing – you will have financial costs, a big change on your long-term credit record, and emotional pressure to deal with. Let's take a look at how the bankruptcy process works.

Making the Decision
Before you choose to simply walk away from your debt, consider finding another way to handle it. For example, you could contact your creditors and ask them whether you can make a payment arrangement. Often these companies will temporarily reduce your minimum monthly payment. They may even waive late fees or extend the payment period at your request.

If you have more than one account in serious debt, you may choose to visit a credit counselor. Be careful to select one that is not-for-profit, so that they protect your interests and not their own. The Consumer Credit Counseling Service is a nonprofit organization that acts as a liaison between debtors and creditors to try to create a repayment plan that is manageable.

Some people find that they can get alternative financing that improves their ability to pay their outstanding debts. They may consolidate all of their debts into one loan, or borrow money against the equity in their home in order to pay off their bills and avoid bankruptcy.

If none of these are an option, or if you are unable to meet the payments structures your creditors can provide, you might choose to go ahead and file for bankruptcy. The filing will instantly cause creditors to stop hassling you, because federal guidelines prevent attempted collections after an individual has filed for bankruptcy. Filing also will prevent them from being able to file lawsuits against you.

Be aware that some debts will not be discharged simply because you file bankruptcy. These include:

• Student loans
• Alimony
• Child support
• Drunk driving restitution
• Debts that have been incurred fraudulently

Which Type of Bankruptcy to File
There are three main types of bankruptcy: chapter 7, chapter 11, and chapter 13. The Bankruptcy Code determines which kind of bankruptcy you can take. Chapter 7 is often referred to as a liquidation bankruptcy.  Chapter 7 is appropriate for individuals, partnerships, or corporations.

Chapter 13 bankruptcy is sometimes referred to as a “wage earner's plan.” Under this plan, you propose a payment plan that will make monthly payments to your creditors over three to five years. The law does not allow the payment plan to extend beyond five years. During this time your creditors may not continue their collection efforts; they must give you a chance to repay your debt. Chapter 13 is only available to individuals; corporations and partnerships are not eligible.

Chapter 11 bankruptcy is for the reorganization of a business. It allows a corporation or partnership to keep the business going while paying off creditors over time.

The Process
In order to file bankruptcy, you must go to your local branch of the US bankruptcy court. The bankruptcy code contains a '”means test” that checks to be sure your income falls in the right range to justify filing for bankruptcy. The means test also determines which type of bankruptcy you are eligible for.

Certain documents will be required, and you should get your paperwork in order before visiting your local branch.  Documents you should take with you include:

• A list of all creditors, the amount of money you owe them, and what the debt was for
• A statement of all your income
• A list of all your property
• An itemized list of your monthly living expenses.

If you qualify, you will then file the petition and all the necessary paperwork, and pay fees (from a few hundred to over $1,000, depending on the type of bankruptcy you file). If you have filed Chapter 7, the court immediately begins liquidating your assets in an orderly manner. If you filed Chapter 13, the court may appoint a trustee to oversee your repayment plan. And for Chapter 11, you will spend the next 120 days working to reorganize the debt load and the business. The court also requires that every person or business filing for bankruptcy undergo financial counseling.

A “discharge” (the release of your obligation to pay a debt) may take place as early as four months after filing, or at the end of the 5-year term for Chapter 13. Many people believe that Chapter 7 gives an absolute right to a discharge but that is not true; if the debtor chooses not to complete the financial management class, the court may not discharge the debt.

After you have filed for bankruptcy, your credit report will show the filing for up to ten years. A few agencies will remove it after seven years. However, most experts say that even with a bankruptcy on your credit record, lenders will often give you new credit anyway. This article is not meant as legal advice; before choosing to file for bankruptcy, be sure to check with an attorney.

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