The word "bankruptcy" has a bad connotation, and for good reason. However, is it a bad thing for everyone? The answer varies depending on your situation but it is worth taking the time to read this and other articles, and possibly to discuss with an attorney.
There are two types of bankruptcy:
Chapter 7 Bankruptcy This type of bankruptcy cancels all or a large portion of your debt and takes about 6 months to complete. Most of the time you get to keep property, though some can be taken and sold to pay debts. The filing fee is relatively low but you may opt for an attorney. You must fill out a lot of forms that tell the court how much you make, living expenses, what you have spent money on over the past two years, exempt property, and property you have sold or given away.
This is typically the best of the worst, but there are times when it will not work. First, and most obvious, includes any previous bankruptcy. Chapter 7 or 13 history will prevent future filings for six years. If you have successfully filled, a second filling cannot be done for six years. You cannot file if a previous case was dismissed within 180 days if a court order was violated or if dismissal was requested after a creditor requested relief from a stay.
The court does not want to see a second filing so if you expect to take on more debt, even for necessities, do not file. Any additional debt will not be discharged. If you ran up debt for luxuries, also stay away from filing. Especially if the creditor objects, the debts for vacations, luxury cars, or hobbies, will not be protected.
Bankruptcy is provided for the honest debtor who got in over their head and needs protection. If you have tried to take advantage of the system, your case will be thrown out. Examples include ‘giving’ assets to your friends or family to hide them, or incurring debts for non-necessities when you knew you were in bad shape to begin with.
If someone has cosigned a loan for you, they will be held responsible and will not be protected from the creditor. If someone cared enough to cosign, contact them and let them know the situation. You owe them that much.
Certain debts and assets cannot be discharged. If any of the following are a major reason for filling, stay away from doing so:
Income taxes, especially less than a few years past due
Student loans that were due less than seven years ago
Injuries or deaths caused by DUI
Child support and alimony
Creditors may object, and there are additional debts that may not be protected depending on the situation. However, the following items can be protected, but this varies by state:
Equity, or some of it, in your home
Items you use for your livelihood
Life insurance
Benefits such as pensions plans, retirement plans, or welfare
Clothing, furniture, and other reasonable items needed for living
Jewelry and clothing within reason
Chapter 13 Bankruptcy Chapter 13 requires you to fill out the same forms, but it does not forgive debt. Instead, it offers a plan to repay all or part of what is owed. From first view it might seem this is not as good of an option. However, there are a few good reasons why it might be better.
If you hope to catch up on payments and reinstate the agreement
Assets like cars or property would be lost in Chapter 7
Previous Chapter 7 has been filled
Income taxes are owed and would not be protected in Chapter 7
Assets have a cosigner
There are several reasons Chapter 13 may not work for you, starting with a level of debt that is unacceptable. Most will not fit in this catagorey, but debts may not exceed $750,000. If you owe this amount or more on secured items such as homes or car loans, Chapter 13 may not be good for you. Unsecured debt may not exceed $250,000, which typically includes credit cards, medical, and student loans.
In order to repay debts, you must be able to show sustainable income, which is a requirement for Chapter 13. You must be likely to make payments on the plan set forth to repay debts, but also have enough to live. Your income must be high enough that you will be able to pay usual living expenses and stick to the plan.
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