bankruptcy bite bulletBankruptcy is a legal remedy provided by the United States Bankruptcy Code that allows the Courts to either discharge a person’s or company’s debts and outstanding loans or establish repayment plans to creditors. While credit agencies won’t say which is worse, both are major events that can leave many creditors unpaid which means your credit score will take a serious hit.

At present, roughly 80,000 personal bankruptcy petitions are being filed each month in the U.S. Of the various personal bankruptcy plans available Chapters 7 and 13 are the most common. Businesses most often petition under Chapters 7 and 11.

Bankruptcy can be a complicated process and mistakes could cost a petitioner the protection of the automatic stay or prevent the petition from being approved.

All personal bankruptcy petitioners are required to complete a U.S. Trustee approved Credit Counseling Briefing. Make sure that your bankruptcy lawyer files the Credit Counseling certificate with your bankruptcy petition.

This is important because bankruptcy petitions filed without a Credit Counseling certificate may be dismissed, allowing creditors the opportunity to take action, such as moving forward with foreclosure or repossession.

Upon filing a petition an “Automatic Stay or Order for Relief” is issued by the Bankruptcy Court that prohibits creditors from any collection efforts. The process puts a stop to phone calls, foreclosure, repossession, lawsuits, wage garnishments and harassment.

Chapter 7 bankruptcy is fairly straightforward in its application – “liquidating” assets and “discharging” debts. Before being granted a Chapter 7 petition, the petitioner must pass a “Means” test for income.

Chapter 13 is more complicated. Bankruptcy Trustees formulate a “repayment schedule” (usually of 3-5 years) during which time creditors are not permitted by law to attempt collection or file lawsuits against the petitioner. At the end of the time period (if all payments have been made according to schedule) unsecured debt may be discharged.

Unlike Chapter 7, Chapter 13 doesn’t liquidate assets and immediately discharge unsecured debts. Instead, Chapter 13 is intended to help people facing financial difficulty keep their property while gradually catching up on past due balances.

In addition to making payments as agreed to when filing bankruptcy under the Chapter 13 plan, Chapter 13 bankruptcy petitioners must complete a U.S. Trustee approved financial management course (often called Debtor Education) before a discharge may be granted.

In order to qualify for Chapter 13 bankruptcy, a debtor must:

  • Have a regular source of income from which to make pre-determined payments
  • Have enough disposable income to make regular payments after covering current necessary living expenses
  • Fall within pre-set limits for secured and unsecured debts. The limits are updated periodically and a local bankruptcy attorney can tell you the exact current limits for secured debts.

For those who do not qualify for Chapter 13 bankruptcy, Chapter 7 may still be an option.

Whether to file bankruptcy or let your home go to foreclosure can be a very difficult decision and will depend on your specific situation, your income, your total debt and your other expenses. Many times, you can file bankruptcy and lose your home in foreclosure anyway. Discuss with a bankruptcy lawyer whether a bankruptcy could actually save your home.

A Bankruptcy Attorney can provide the legal expertise, knowledge and information to help you decide which form of bankruptcy protection is best for you.

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