Bankruptcy law provides for the reduction or elimination of certain debts, and can provide a timeline for the repayment of non-dischargeable debts over time. It also permits individuals and organizations to repay secured debts –typically debts with real estate and vehicles pledged as collateral — often on more favorable terms to the borrower.
In 2005, Congress overhauled the bankruptcy laws. Those changes made it harder for some people to file for Chapter 7 bankruptcy; high income filers that can’t pass the means test, will have to repay at least some of their debt in a Chapter 13 bankruptcy. In addition, the 2005 law requires all bankruptcy filers to get credit counseling before they can file a bankruptcy case — and additional counseling on budgeting and debt management before their debts can be wiped out.
Chapter 7 bankruptcy comes under the liquidation category. It’s called liquidation because the bankruptcy trustee may take and sell (“liquidate”) some of your property to pay back some of your debt. However, you may keep property that is protected (also called “exempt”) under state law. There are several types of reorganization bankruptcies, but Chapter 13 is most commonly used by consumers. In Chapter 13 bankruptcy, you keep all of your property, but must make monthly payments over three to five years to repay all or some of your debt.
It’s not easy deciding on whether or not to file bankruptcy. There’s no magic formula to tell you if it’s right for you. However, if you’re overwhelmed with credit card and other debts or facing foreclosure, and you’ve tried all other options, bankruptcy may be your best and only chance at a fresh start. Before filing for bankruptcy, consider what types of debt you are trying to eliminate and whether you can realistically deal with these debts outside of bankruptcy. If you are struggling with credit card debt, determine whether you can afford to pay it off. If you have enough income to pay back your credit cards, you may be able to consolidate them into a single loan or settle your debt with the credit card company.
Filing for bankruptcy involves submitting a petition and fee to the bankruptcy court. The fee is close to $300 for most personal bankruptcies. The petition will contain sworn statements by the debtors concerning the amount of money they owe, their income and expenses, as well as a complete list of all of their assets. After filing, a court hearing is held to review the information in the petition.