No one ever goes into deep, financial debt on purpose, but sometimes things happen, causing bills to mount and personal debt to spiral out of control. You may have lost your job or become ill with a serious medical condition that leaves you in the hospital for a long time. Or, perhaps, you just lived beyond your means. Regardless, if your debt is out of control and creditors are calling at all hours of the day to get their money, filing for bankruptcy may be your only course of action to put an end to most of your debt obligations and start your life over again.
Types of Personal Bankruptcy Protection
According to the United States Bankruptcy Code, there are two types of personal bankruptcy protection that an individual can be granted. These two categories of bankruptcies are called chapter 7 and chapter 13 bankruptcy protections. You may file for one or the other depending on your current financial situation and your ability to repay your debts. While both types of bankruptcy will offer your protection from creditors, the actual mechanics of the bankruptcy filing and what it means to your financial future are completely different.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy protection is the type of bankruptcy that most people think about when someone mentions the term. In a chapter 7 bankruptcy filing, the bankruptcy courts will liquidate your personal assets in order to pay off your creditors. Once the money that has been raised from the sale of your assets has been split among your creditors, most of your remaining debts will be discharged by the bankruptcy courts, giving you a fresh financial start.
To file for chapter 7 bankruptcy protection, you must first qualify for it. You must pass an eligibility standard called the Means Test in order to be granted bankruptcy under chapter 7. The Means Test is an estimation of your ability to meet your debt obligations and is calculated by using a mathematical formula that takes into account your income and other assets. In order to pass the means test and be granted chapter 7 protection, you must earn no greater than $166.67 over your state of residence’s median income. The median income of a state refers to an amount of income in which half of the people in the state make more and half of the people in the state make less. If you are not eligible for chapter 7 bankruptcy because you cannot pass the means test, you can still file for chapter 13 bankruptcy.
If you need to file for chapter 7 bankruptcy, the following items may be exempt from liquidation:
- Transportation for work
- Clothes
- Furniture
- Household items
- Judgments from lawsuits
- Pensions
- Some pieces of jewelry (e.g. wedding rings)
Each state will have its own list of items that are exempt from liquidation.
Chapter 7 bankruptcy will stay on your credit report for ten years, which can make it difficult for you to obtain loans, find housing, or even find employment.
Chapter 13 Bankruptcy
The second type of bankruptcy that an individual in the United States can file is called chapter 13 bankruptcy. The primary difference between chapter 7 and chapter 13 bankruptcy is that chapter 13 bankruptcy is a modified debt consolidation plan. If you file for chapter 13 bankruptcy, you will have to repay your debts, whereas with chapter 7 bankruptcy, most of them can be discharged permanently. Chapter 13 bankruptcy is sometimes called a workman’s bankruptcy, because it is usually filed by people that are employed and have a steady stream of income.
In order to file for chapter 13 bankruptcy, you will need to file a petition in federal court for the bankruptcy filing. Once your application has been processed, you will be asked to present the courts with all of your financial records and a list that includes the names of your creditors, how much money you owe, your income, estimated expenses, financial history, and any other information that is pertinent to your financial situation. You will also need to present a detailed plan that outlines how you can restructure your debt and can pay it off in a timely manner. One to three months after filing your bankruptcy petition, you will have a hearing in front of a judge or a bankruptcy trustee to meet with your major creditors who may ask for amendments or revisions to your plan. Once your plan has been approved, the bankruptcy will be approved and your creditors will be notified. Most debt repayment plans last between 30 and 60 months. If you fail to make any of your payments on time, your bankruptcy protection may be stripped, opening you up to your creditors.
Exemptions from Discharge
Not all debts can be discharged by filing for bankruptcy. Although the list of exemptions differs slightly from state to state, the following can almost never be discharged by the courts:
- Student loans
- Lawsuit judgments against you
- Spousal support
- Child support
- Federal, state, and local taxes
- Debts that are the result of criminal activity
Finding Help
If you ever need to file for bankruptcy, you should consider hiring an attorney to handle your case. Filing for bankruptcy can have a serious effect on your life and hiring an attorney can help you to make sure that your interests are being protected. Bankruptcy laws are complex and vary from region to region, making it even more important for you to hire good representation.
