All You Will Ever Need to Know About Filing Bankruptcy
There is a common misconception that most Americans who file bankruptcy do so as a result of overcharging their credit cards. While this may be true for some, you may be surprised to learn that the top three reasons most consumers choose to file include:
* Unexpected medical bills due to serious illness or injury
* Loss of unemployment
* Divorce
Is Bankruptcy An Option For Your Situation?
So how do you decide if bankruptcy is an option you should consider? You may have heard that bankruptcy should always be a last resort and if so, you heard right. The bankruptcy law was created to provide debt relief to struggling families. It is your legal right to file bankruptcy if your struggling to make ends meet.
Below you will find some questions for you to answer, which may help you to decide if filing is an option for you and your family.
* Are you afraid to answer the phone because you know it’s another creditor?
* Have you been sinking in debt for a long time with no sign of relief?
* Are you lying awake all night fearful of how you’ll pull through?
* Are your wages being garnished? House in foreclosure? Car repossessed?
* Are you borrowing money so you can pay the bills?
If you find yourself taking a loan out against your car so you can pay the mortgage or deliberately going behind on utility payments so you can purchase groceries, then you may be a very strong candidate for bankruptcy.
The first step you will want to take is to call a lawyer. The thought of paying for an attorney may be overwhelming but most lawyers who specialize in bankruptcy law will understand this and not charge for an initial consultation, some will even go so far as to answer a few of your questions over the phone.
Depending on which type of Bankruptcy you file, you may be able to place your payments within the bankruptcy (chapter 13). Most lawyers will work with you to set up a payment plan that you can afford.
Choices, choices, Decide Which Chapter You Want To File
You may be thinking by now that you definitely could use some relief from your debt. How do you know which bankruptcy is for you?
Chaper 7
Chapter 7 is a liquidation bankruptcy, often called a “fresh start” bankruptcy. This means that your assets are switched over (liquidated) to cash. If you qualify for a chapter 7, most of your assets will most likely be exempt. Most of your debts are eliminated with the exception of child support, student loans and most taxes. The process usually is quite swift and most filers are discharged within four months.
Do You Qualify?
Last year, before the new tax laws went into affect 70% of all bankruptcies filed were under chapter 7. The new law has made it tougher but is still available for those who qualify. You may be eligible if:
You are unemployed or considered to have low income
You are struggling to pay basic living expenses each month
You rent or have very little equity in your home
You have no assets other than your furniture, clothing and other necessities.
If your experiencing financial hardship and can relate to the above statements, then you and your lawyer may decide to apply the means test. Under the new law, you must pass a two step test to determine if you truly fit the above criteria.
Don’t let the means test intimidate you, it is simply a tool used by the court to rule out bankruptcy abuse. The majority of consumers who meet the above criteria still qualify for chapter 7 even after the means test is applied.
How The Means Test Works
The test is divided into two steps. The first step compares your gross income to that of others in your area. If you’re monthly income is the same or below the average then you’re done with the test and you’re able to file for a chapter 7.
If you’re above the average income you move on to step 2. Your allowable expenses (food, clothing, etc.) are deducted from your monthly income based on the IRS national standards. The remaining amount is your disposable income and is then multiplied by 60 (months). This will show how much disposable income you will have over the next 5 years.
If your total amount is under $6000 you will definitely qualify for a chapter 7. If your income is over $10,000 you will not be able to file for a 7 but may be able to still file for a chapter 13. If your disposable income for the next 5 years happens to fall between $6000 – $10,000 then your case will be open to further analysis under the direction of your attorney. You may still qualify for a chapter 7 depending on your specific circumstances.
You do need to keep in mind that you will be required by the court to participate in a debt management class before your case can be discharged. You will be expected to pay for this class out of your own pocket.
Chapter 13
A chapter 13 is an adjustment of debts for an individual who has steady income from employment. The following statements are guidelines to help you determine if a chapter 13 will be the best fit for your situation.
You have equity in a home or other property and don’t want to lose it to creditors.
You have steady income and are able to pay living expenses but unable to keep up with all your additional payments (hospital bills, loans, credit cards, ect.
Your unsecured debt is under $307,675 and your secured debts are under $922,975.
Repayment Plan
Your chapter 13 will be based on a repayment plan, which will take 3-5 years to complete. You will be required to meet with a court approved credit counselor before you file to determine if you have other options you can take that would be a better fit than bankruptcy and also to assist you in completing a budget analysis.
Once your attorney has filed your petition for a chapter 13 bankruptcy, a letter will be sent out to all your creditors and you will be appointed a bankruptcy trustee who will distribute your monthly payments to each of your creditors under your payment plan.
Special Circumstances
Student loans are not allowed under your payment plan but are deferred. This means that you will not have to make payments on them until after your bankruptcy has been discharged, however they will continue to incur interest.
Current child support payments are not protected under bankruptcy law, but any back payments that you have (perhaps due to job loss) are allowed to be placed in your payment plan. Taxes are a special area and depend on the taxes and your situation.
In most cases your overall debt will be drastically reduced. While you’re in a chapter 13 bankruptcy you will be dealing directly with your attorney and the bankruptcy trustee. You will never deal with your creditors. However, if you fail to meet any of your requirements stated in your plan, your case can be dismissed.
Before your case is dismissed, again you will be required to attend a money management class at your expense just as you are in a chapter 7.
Watch Your Step If You Plan To File
Most consumers who plan to file bankruptcy make serious mistakes before they file which can seriously cause them unnecessary heartache. You may want to avoid the following:
Transferring assets into another person’s name
Paying a creditor a large amount of money (including family members you may owe money to)
Selling assets
Obtaining cash advancements or new loans.
A general rule of thumb is to avoid the above at least 6 months before filing. If you paid your Aunt Sarah back the $150 you owed her, don’t sweat it. But if you paid your SEARS credit card an extra $500 with the Christmas bonus, and all other creditors received their regular minimum payments, then you will need to divulge this information to your attorney.
The courts do have the authority to take action if they feel that any abuse is going on but as long as your honest and in genuine need, you will find the bankruptcy process to be fair. As difficult as the process may be, bankruptcy can help you to start over fresh and regain financial health. If you’re losing sleep over your debt, then you owe it to yourself to pick up that phone book and start dialing.
