In these difficult economic times, you may find yourself with too much debt and perhaps you are having difficulty meeting everyday expenses. If you are one of the millions of people who are struggling with overwhelming debt, you may be considering filing for bankruptcy. Before you file for bankruptcy, it is helpful if you first understand the bankruptcy laws as well as the restrictions of the bankruptcy codes.
A) Bankruptcy Codes
The three (3) bankruptcy codes that apply to individual persons are:
Chapter 12 bankruptcy – Chapter 12 is specifically set up for those who derive their income from fishing or farming. All states have their own requirements but this code allows for a restructuring of debt for those who have significant investments in equipment for employment reasons (i.e. tractors, boats, etc.).
Chapter 13 bankruptcy – Chapter 13 may be used by wage earners (those who are employed and collect W-2 wages) and allows you to restructure existing debt and pay the balances owed over three (3) to five (5) years.
Chapter 7 bankruptcy – Chapter 7 allows the full sale of non-allowable assets (i.e. your primary residence is an allowable asset) and allows you to pay off creditors with the proceeds. While each state has individual requirements (which should be reviewed by a qualified bankruptcy attorney) individuals who have assets that can be liquidated to reduce their debt often use a Chapter 7 filing. Chapter 7 is the most commonly used form of bankruptcy used by individuals since it allows for a full discharge of allowable debts such as credit cards, revolving credit and medical bills. You would still be required to pay the mortgage on your home even after filing a Chapter 7 bankruptcy.
B) Debts that may not be discharged
If you own a boat, a snowmobile, or other large assets that currently have outstanding loans (e.g. liens) against them, filing for bankruptcy may not protect those assets. In fact, there is a very good chance that once you file for bankruptcy protection, your failure to make payments may result in seizure by the lender.
If you are one of the thousands of people who owe back taxes, child support payments, alimony payments, have a judgment against you for a personal injury suit or have outstanding student loans, filing for bankruptcy will not eliminate these debts. These debts are considered non-revolving debts and if they are the bulk of your outstanding debt you may need to file Chapter 13 Bankruptcy rather than Chapter 7.
When you are filing for bankruptcy, you must list all monies that you owe. Failure to include any debts in a bankruptcy filing means in spite of your filing you will still be required to pay the balances due along with any additional fees or penalties. When you meet with a bankruptcy lawyer, you should bring a copy of your credit report as well as a list of all debts that you owe to make sure that all of your debts are included in your filing.
C) Changes that affect filing
In 2005, there were some significant changes made to the bankruptcy laws, which have an impact on your ability to file. While most people have previously used Chapter 7 as a way to discharge their debts, the new laws may require you to file a Chapter 13 Bankruptcy. The new laws state that you must provide full proof of your income. Once all of the calculations are completed if you are able to pay $100 per month on your debts you may not be allowed to file a Chapter 7 bankruptcy.
There are also rules for counseling that includes both before and after bankruptcy counseling. These classes must be conducted by a counseling agency that is approved by the US Bankruptcy court and certificates showing proof that you have attended will be required both before you file as well as before your bankruptcy is discharged. These classes are often offered free of charge but in some cases may charge a small fee. The typical classes include information on budgeting and personal financial management.
The bankruptcy rules are extremely complex and each state may have specific statutes that affect your ability to file for bankruptcy protection. Understanding how the bankruptcy laws apply to your individual circumstances will help you determine if filing for bankruptcy is right for you. If you’re feeling overwhelmed with debt make sure you review all of your options carefully before making a final decision. An attorney who specializes in bankruptcy law can help you navigate the different requirements as they apply to your circumstances and help determine your best course of action.