Filing for bankruptcy is believed to be the best solution for those facing excessive debts and foreclosures. It provides you with the facility to avail bankruptcy loan once all your debts are repaid and the bankruptcy case is dismissed. The loan is offered to restore your financial condition and bring you back to normal. However, you should know that it's going to stay on your credit report for more than a decade (though the duration depends on the chapter you opt for). This bankruptcy record affects the future prospects of getting a loan, credit card, or a mortgage. Consequently, it makes progress in your life much more difficult. Also, revisions were made in bankruptcy law in 2005 that introduced severe restrictions which made the act of filing for bankruptcy even more complicated.
In case you are considering filing for bankruptcy, this article entails all the information about bankruptcy, the process of filing for it, and the consequences it will have on your financial condition.
The Process of filing for Bankruptcy
The only legal way to get rid of your financial setbacks is by declaring yourself bankrupt. It should be kept in mind that filing for bankruptcy is a lengthy and difficult process. The process requires to explain the reason behind it. You'll have to let the presiding bankruptcy judge know about how you got into the present financial crisis. You'll also be required to submit a list of all your assets along with your outstanding debts.
If you are filing for bankruptcy, there are certain terms and categorizations you must be aware of such as the type of assets and debts.
Types of Assets
Assets are categorized into Exempt assets and non-exempt assets depending on their nature. The assets that cannot be seized and sold to pay debts are called the exempt assets. For example, a personal item, automobile or a part of equity in your home etc. fall under exempt assets. Similarly, non-exempt assets are those that can be used to repay your outstanding debts. These include any residential property other than the home one resides in, boats, RVs, cars, etc.
Types of Debts
Just like assets, debts are also divided into two different types; secured debts and non-secured debts. All those debts in which the creditor is provided a property as security for repayment of a loan are considered secured debts. Such a property may be a boat, a car, or another home. Another thing to note is that non-secured debts are not provided with a collateral. Medical bills or credit cards are included in non-secured debts.
Secured debts are considered critically important by the bankruptcy court. This is because if there is a failure in the repayment of these debts, the creditor is given the right to claim the property provided as collateral. As soon as the court is provided with all the essential information, a bankruptcy trustee is appointed to ensure that the secured debt gets repaid within the given duration. Meanwhile, the court also issues a stay order that prohibits the creditors to lay their hands on the debtor through foreclosure or property confiscation. Under a stay order, the creditors are also not allowed to file a lawsuit against the debtor.
How do you know which Chapter is better for you?
You are required to choose between Chapter 7 or Chapter 13 of the bankruptcy law. The choice is usually determined by your circumstances.
Chapter 7 provides you with the liquidation option where you are allowed to keep the exempted assets but your unsecured debts will be discharged. According to this chapter, your non-exempt assets will be realized to pay back your secured debts. Under Chapter 7, debts like child support or taxes are not dismissed. Those who have few assets, low earning, and a lot of debts are more likely to opt for this alternative.
Under Chapter 13 of bankruptcy law, you will have to pay back your debts within a specific time limit which may extend from three to five years. Repayment is always made through a logical repayment plan. The court designates a trustee who transfers the payments from you to the creditors. This Chapter also allows you to keep your home and therefore, prevents any chances of foreclosure. This option is preferred by those who want to keep their non-exempt property and also want more time to repay their debts. This option also provides with more time till the seizure of property or foreclosures.
How the revisions of 2005 affect the bankruptcy law?
The implementation of revisions has made it more preferable for people to opt for Chapter 13 instead of Chapter 7. An individual's monthly income is calculated against the average income for a family of his size to find out whether he is eligible for Chapter 7. If the salary of an individual is higher, he is required to take the means test to fulfill the criteria for Chapter 7.
The means test finds out the remaining disposable income of an individual. This is calculated by subtracting the secured debt payments and the specific expense from the current monthly income of an individual. Those who have a disposable income less than $100 are allowed to file for Chapter 7. However, if the disposable income ranges from $100 to $166.66, it is multiplied by 60 to find out if there is enough money left to pay about 25% of the non-secured debt within a period of five years. If the grand total is more than 25%, you can choose Chapter 13 and if it's not, you will only have access to Chapter 7.
Here again, the court holds the authority to force someone to file for Chapter 13 even if they are eligible to file for Chapter 7. This may happen if the court recognizes that the individual may misuse the system by filing for Chapter 7.
As a final point, declaring yourself bankrupt may not turn out to be the best solution to your financial crisis. There is a huge chance that it will result in a bad credit for you. Therefore, you might want to consult an experienced bankruptcy attorney before you consider filing for bankruptcy. An experienced attorney may help you make the right move in the right situation and give you the needed relief from stress and debt.
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