If you have a lot of debt that you are not able to repay and have exhausted all other options, filing for a bankruptcy might be your last resort.
Fortunately, we don’t live in Dickensian times and there is a civilized process to engage in this option. The law lays out the procedure to go through bankruptcy and determines which properties your creditors can get their hands on to offset your debts.
Types of bankruptcy
There is more than one process whereby you can file for a bankruptcy. The two types people most favor are Chapter 7 bankruptcy and Chapter 13 bankruptcy.
A chapter 7 bankruptcy enables you to legally discharge, or no longer be liable for, most debt that you owed as of the date you filed for the bankruptcy. This process takes about three months after you file the bankruptcy petition. You could lose some of your property by taking this route. If you had transferred property before filing for bankruptcy, the transfer may be reversed to you.
A chapter 13 bankruptcy enables you to enter into a payment plan to pay off your debt over a three-to-five-year period. Congress has even extended the plan period to seven years, with some exceptions, as a result of the covid crisis. This process protects your property and prevents wage garnishment, and you are able to pay back your outstanding debt through your payment plan. You have to make a payment out of your disposable income every month.
Going through the bankruptcy process
Before going through the bankruptcy process, you might want to consider certain factors. In a post for the Oregon State Bar, legal editor Richard Slottee advises:
- Make a list of your monthly income and expenses.
- Even if you discharge your debts in bankruptcy, you could easily rack up new debt again if you don’t have medical insurance or automobile liability insurance.
- Make a list of all your creditors, with their addresses and the amounts of money you owe them.
- Some people may be “judgment proof,” in that they may not have property of adequate value to seize or sufficient income to garnish even though their creditors got a court order against them. Creditors may not think it worth their while to sue such people, but you may still want to file for bankruptcy to stop their harassment.
- If you have a tendency to rake up debt, filing for bankruptcy may not be a permanent solution. You can file for another Chapter 7 bankruptcy only after eight years. It’s best to resolve your financial issues beforehand so that you don’t face the risk of bankruptcy again.
- Certain types of debts are exempt from bankruptcy protection. If you owe child support or support for your spouse, you can’t evade these responsibilities through bankruptcy. Criminal restitution and criminal fines are also among such debts that bankruptcy protection doesn’t extend to.
- If you owe personal income taxes, it can only be discharged in limited circumstances, and the same is true for your liability for passing bad checks or fraudulent credit card activity. Student loan debt is also notably difficult to rid yourself of.
What can creditors take in a bankruptcy?
Your “bankruptcy estate” is made up of all your income and property that creditors could potentially get hold of. This includes all the property that you own at the time of the bankruptcy filing, as well as any income that you have earned, even if you haven’t received it yet.
Even some property that you don’t own at the time of filing, such as an inheritance you are expecting, the proceeds of a divorce settlement or decree that you won within 180 days of filing for bankruptcy, could be parceled into your bankruptcy estate. If you are owed a tax refund, that could also go into the pool.
If you have transferred, sold or given away some property two to four years before filing for bankruptcy, and did not receive a “reasonably equivalent value” in payment, your creditor could lay claim to such property as well.
If you paid $600 or more in debt to a creditor within 90 days before your bankruptcy filing, or paid off $600 or more to a relative or friend in the one-year period before your filing, your creditor could also lay claim to that amount.
Essential property has bankruptcy exemptions
There is some essential property that the law protects from being seized. For instance, such property could include your car, your home, furniture, your professional tools and retirement accounts.
There is a dollar limit for such “exempt” property, and you will have to follow the legal procedures to put in your claim for these exemptions. You could either opt for your state exemptions, which vary, or the federal exemptions.
If you file for Chapter 13 bankruptcy, all your property is usually exempt, considering that you will be paying off your debt on a time schedule.
What to know before filing for bankruptcy
As a fallout of your bankruptcy filing, your credit will be tarnished for a 10-year period if it is a Chapter 7 bankruptcy, and a seven-year period for a Chapter 13 bankruptcy.
Even though you are not legally required to hire a lawyer to handle your bankruptcy, it may be in your best interest to do so. You may even be able to avail of free legal services.
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